Spanish fear

Developments in Portugal and Spain, like those in Greece, are part of a much wider crisis of the European economy.

The crisis in Europe spirals downwards. Political uncertainty over Greece now marches in lockstep with creeping financial failure in Spain. Credit rating agency Moody’s last May downgraded 16 Spanish banks in the belief that they are at an increased danger of collapse should a serious run on the banks begin. The Spanish government denied at that time that Bankia was suffering from just such run. In Greece, around €700m has been taken daily from the banking system since the inconclusive election on May 6.

Bank runs are an inherent problem for the banking system. Banks create long-term loans, but take deposits on a short-term basis. This is how credit is created – banks, in effect, lend out more money than they actually have available. There’s nothing greatly mysterious about this process, and under normal conditions, the difference between the two does not matter greatly. At any point in time the bank can usually access sufficient reserves to cover all the day-to-day demands made by depositors for their cash. For as long as depositors believe that their depositors are safe, the bank is also safe. A bank run occurs when this confidence evaporates. Depositors descend on the bank in a panic, demanding the withdrawal of savings for safer locations – another bank, abroad, or simply shoved under the mattress. But while rational for the individual depositors, this panic – a run on the bank – can bring about the very collapse of the bank they are trying to avoid. Worse yet, panic can spread rapidly throughout the system.

« Over the past 12 months, some $425 billion in deposits have been pulled from banks in Greece, Italy, Portugal and Spain. And about $390 billion in deposits have piled up in core euro countries, particularly France and Germany » (1)

The last public run on an EU bank was in May 2012, with queues forming outside Bankia as worried depositors attempted to withdraw whatever cash they had access to. To avoid this prospect, governments have developed over the years a number of ways to insulate their banking systems from their inherent instability. Governments offer to act as a lender of last resort, promising to ensure banks always have sufficient liquidity – cash at hand – to meet the demands of their customers. Or they may offer deposit insurance, promising to pay out to depositors in the event of a collapse. On May 2007, faced with a run on Northern Rock, Alastair Darling, Labour Chancellor of the Exchequer at the time, made a public statement promising the government’s support for the bank. This restored confidence in the bank’s stability, and broke the run. Governments put these backstops in place to try and preserve confidence in the banking system as a whole. If confidence is maintained, banks are less liable to collapse.

Bank runs can be catastrophic. They heightened the Great Depression of the 1930s, exacerbating the collapse, and possibly were a primary factor in its cause. The European economy was devastated by the collapse of Austria’s largest bank, Creditanstalt, in May 1931. Creditanstalt had spent the preceding years gobbling up smaller, failing banks, while weakening bank regulation hid its bad loans. When a director finally refused to sign off on the bank’s annual accounts, depositors, believing the bank to be insolvent, rushed to remove their savings. The Austrian government stepped in to guarantee bank deposits, hoping to break the panic. But this guarantee merely undermined confidence in the Austrian state itself. Depositors did not believe the country could afford to both stand behind its banks and maintain Austria’s place in the Gold Standard fixed-currency system. The panic spread beyond Austria’s borders: banks in the Netherlands and Poland collapsed in June, in Germany in July. The fear reached the US and UK by mid-summer. The Great Depression was dragged onwards.

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(1)    The slow bank run that could still doom Europe, The Washington Post, September 20, 2012

The corporate capture of governments

The G20 — the most powerful summit of world governments — meets tomorrow to discuss the global economic crisis, and who is sponsoring the meeting? Banks and corporations.

No wonder the site of the meeting — the French city of Cannes — is completely locked down to any ordinary citizens, while banks and large corporate CEOs have all access passes to tell our governments what to do.

Corporations and banks have captured our governments, winning vast bailouts after helping to create the crisis. Now they are buying their way into the very meeting that could decide the world’s financial future.

The line between corporate power and responsible government has steadily blurred, undermining our democracies and our economy. Politicians take money from corporations for their campaigns, make policies that reward them when in office, and then take high-paid jobs with them after they leave. It’s venality, plain and simple.

Now Société Générale, a French bank that received a public bailout and has a vested interest in Europe’s financial policy, is an official sponsor of the summit. This bank and 20 other corporations have paid large sums of money in sponsorship for a seat at the table of our governments.

The only way to get policies that protect jobs, tackle speculators and guarantee a fair future for us all is to kick back against the lobbies and prise our leaders away from corporate interests.  The global economic crisis resulted in large part from reckless banks that were no longer regulated effectively by governments because of the control banks stress over our leaders. This corporate capture of government is the major threat today, both to democracy, and to an efficient and fair economy.

The Need for Radical Change

THE FUTURE OF MONEY (4/4)

Proposed solutions to the financial crisis tend to involve more regulation and the break up or separation of banking activities, but these merely scratch the surface. The financial sector is not only too big; it embodies massive contradictions. In particular, the social role of finance makes it impossible for monetary authorities to let the system fail. This creates moral hazard on an epic scale, ‘Wall Street socialism’ with massive benefits for the financial elite and costs and liability for the many.

Given that the public nature of money makes the financial system a public liability, there is no case for its private ownership and control. As bank credit issue is the main engine of money creation in modern societies, how that money is issued and circulated is a crucial question. The allocation of that credit determines economic priorities.

Under free enterprise system the only priority is private profit. On this basis global speculative ventures are supported while local, particularly social, businesses are marginalised.

The allocation of credit is only part of the problem, however. The main question must be why the private banking system should have control of the monetary system at all. Historically this was developed through the link between trading money, promissory notes and bills of exchange, which were exchanged for bank credit notes designated in the national currency (legal tender). More recently the system has shifted to ‘sight accounts’, money records rather than cash in hand. The question that needs to be asked is: why is the private issue of notes and coin (counterfeiting) punished by law while the private creation of sight accounts is seen as a natural function of banking?

Capitalistic control of the financial system has played a major trick on the public. Given that bank credit is created out of fresh air, like fresh air it should be a public resource, not a private horn of plenty. Decisions about the allocation of that credit should be made democratically. Private profit should not be the only criterion for money issue.

Nor should all money be issued as debt with the interest charged accruing to the issuing financial institution. Debt-based money builds in a growth dynamic that prevents the emergence of a more socially and ecologically sustainable economic system. Instead money could be issued without debt as grants or interest-free loans. The only reason this is not done is that capitalism has ideologically captured economic reasoning. The right of banks to issue money for profit is not challenged.

If people demand to issue money themselves or demand that social and ecological priorities come first they will be told that ‘this cannot be afforded’. The trick is that the market puts some kind of brake on money creation and allocates it most efficiently. The recent crisis shows that neither of these claims is true. Any money creation by the public is decried as inflationary, while massive inflation of the capitalist financial system was given the euphemism ‘capital growth’. The public were to be grateful for the few portions of taxes that were reluctantly extracted from the financial sector.

In fact, there is no reason why money should be issued through the private banking system. It may be that with money under democratic control the public would vote to give financial resources back to the private sector, but it is more likely that social expenditure would be prioritized. The private sector would then have to re-orient its activities to serving public needs. This could form the basis of an economy in which growth would occur in response to social need, rather than the demand for ever expanding profits. Money circulation would return to the production of goods and services and not the never never land of perpetual financial growth. The idea that the whole of society could secure itself on constantly inflating financial assets is a total illusion.

The financial crisis has revealed the financial system’s enormous power and lack of democratic control. Money and finance, nationally and internationally, must be socially and politically re-embedded to enable socially just and ecologically sustainable economies to emerge. Rather than asking ‘can the financial crisis be the basis of radical change?’ the crisis must be the basis of radical change if we are not to continue on the capitalist financial merry-go-round until we all fall off.

The Contradictions of Privatised Finance

THE FUTURE OF MONEY (3/4)

Financialised capitalism rests on its capacity to create credit to lend to itself to inflate its speculative profits and financial assets. But financial asset inflation is always a pyramid scheme, whose value will collapse as soon as there are no new investors.

Traditionally states had a concentration of financial power through their ability to issue money as currency and tax it back. Capitalism has similar power through its control of financial resources. It creates money and calls it back with interest. This puts a growth dynamic into the economy. More money must come back than has been issued; this in turn demands that more money be created.

The neoliberal rationale for private control of money issue is that the market is more ‘efficient’. This is despite the endemic tendency to crisis in financialised capitalism. People have been encouraged to trust their future security in terms of pensions and savings to the financial markets, which in itself creates the conditions for a boom.

While hedge speculators can make money on rising or falling assets, for most people money can only be made on inflating financial assets such as housing or equities. This requires constant creation of credit to fuel the new buyers, a phenomenon that was clearly seen in the mortgage market. When the market has peaked and no one is willing to take on more credit, or the borrowers can no longer pay, the value of the financial assets must fall. Even in the case of hedge speculators, winners will be balanced by losers.

Why were the banks so desperate to lend money recklessly to homebuyers and to develop such complex financial packages? The answer lies in the demand for increased profits to raise dividends and share prices. The bonus strategy of payment in shares also drove this. In such a situation banks engaged in the most profitable aspect of banking, which was also the most risky. It is not without irony that financialised capitalism fell because of its exploitation of the very poor. As capitalism runs out of a market for its goods, services or investments, all that is left is the poor. In the case of financialised capital this was the subprime householder. However, the subprime borrowers did not cause financialised capitalism to fail; the cause was its own contradictions.

Profit-driven banks must always be tempted towards speculation, no matter how many firewalls are put up between deposits and investments. For this reason the calls for narrow banking or smaller banks will not work. As long as the companies running the banks are driven by capitalist values they must be driven by the drive for profit, and therefore risk. This would not be so important if the activities of the privatised banking sector were not a liability on the public. But the financial system is interconnected and the only way to save some parts is to save the whole. The speculative sector can only be separated if the deposit-based sector is not part of the capitalist system and if its credit creation capacity is brought under democratic control.

The private control of banking and finance is fundamentally flawed in that its neoliberal claim to financial freedom is in contradiction to the social foundation of money systems. The crisis has also undermined the claim that through global financialisation a substantial portion of national populations can sustain their economic future through appreciating financial assets. Far from ‘rolling back’ the state, the implosion of deregulated finance has directly contradicted the neoliberal case that the market and its money system is a self-regulating process that would be distorted by state intervention.

Under the illusion that money was a neutral representation of the wealth of the market, financial institutions operated far and wide. Financial traders speculated on currencies and borrowed from low-interest countries to invest in higher-interest ones. Claiming that their industry was global they played off countries against each other, demanding favourable tax status or lodging themselves in tax havens. In doing so they undermined the conditions of their own existence, the public authority of money.

A major problem for countries such as Greece or Argentina is that they have considerable problems in raising tax with substantial informal economies and high levels of tax avoidance. Finance may have escaped regulation but it has also separated itself from the legitimisation of money through public authority. This led the sector to expand to such an extent that the amounts of money at risk threatened the solvency of countries that had residual responsibility for their activities.

Public Foundations of the Financial System

THE FUTURE OF MONEY (2/4)

The financial system is concerned with the issue and circulation of money. Within capitalism the purpose is to direct money to the most profitable use.

Money is a peculiar phenomenon, real and not real so far. In essence it is a promise. Holding money is a claim on any resources, goods or services that are categorised in money terms. However, for these claims to be realised, the sellers of resources, goods or services must trust in the persistent value of that money.

Historically, money has been made of a commodity that can itself be resold, such as gold, but today it mostly consists of base metal, paper, or merely electronic records. People trust it because convention and experience tells them it will be honored. It is also backed by a public monetary authority as legal tender that has a stated value.

This is critical to public responsibility for money. For example, all monetary activities designated in pounds are collectable from the British banking system (or its international agents). Underlying the whole banking system is the Bank of England. Despite it having been made independent in policy terms, the Bank’s authority rests on the financial viability of the nation in terms of its productivity (GDP) and its ability to collectively assemble money through taxes.

As has been shown in Iceland, the people, through the state, are forced to take on financial liabilities created by the private sector. If a company produces a car that ceases to function, the owner does not go to the state asking for a new one. With money, however, this is exactly what the holder of that money will do. People invested in Icesave, the Icelandic online bank, because it offered higher interest. Despite the fact that the bank was linked to a small country of only 300,000 people, investors did not see it as a risky investment.

When the parent bank failed, depositors turned all together to the British government and demanded payment in full. In order to secure the safety of its own banks, the UK lent Iceland the money to repay deposits – a huge debt on the Icelandic people against which they are now protesting.

How could Iceland’s banks have financial commitments several times larger than its economy? Partly this was because the banks took in deposits from around the world, but mainly it was because banks can themselves create money. They do this by issuing bank credit – loans.

Free market has been built on bank credit. Traders and companies have borrowed bank money to set up their businesses. Recently most credit issue has been related to consumption or financial investments such as housing. The illusion is that banks act as intermediaries between savers and borrowers, but that is not so. Banks take in deposits, some paying interest. They also issue loans and charge interest. There is no direct relationship between savers and borrowers.

All deposits are returnable, regardless of what loans are still outstanding. Banks can also lend much more than they have in deposits, traditionally up to ten times more and even more in recent years. This is how financial sectors can explode in total value, eclipsing the productive economy and inflating financial assets.

Recently bank lending has contributed to the vast use of ‘leverage’ to enable the investments of the rich to go even further. Hedge funds, private equity investments and the investment arms of banks use borrowed money to inflate their speculative gambles. Some of these may even be gambles against the banks themselves or the national currency. As more money is issued it floods into the financial system and becomes part of the waves of money looking for a profitable home. As it is impossible to separate the interests of bank depositors or pension holders from financial speculators, in a crisis the whole system must be secured.

In such a crisis, the public groundwork of the money and banking system becomes clear. As all bank-created credit is designated in the national currency, this becomes a liability on the state. The logic would be that such a public liability should also be seen as a public resource. If the people are to be made ultimately responsible for whatever money is issued in their name, should they not have a say about how this money is used?

Far from having democratically controlled access to the process of credit issue, the public, as represented by the state, has itself to borrow from the capitalist owners and controllers of the nation’s money supply or tax money for public expenditure as it circulates. Today more than 95 per cent of money issue is through bank credit. Historically states controlled much higher levels of money issue as coinage. As expenditure on social or public needs are seen as secondary to privatised economic forces, the private sector determines how much public expenditure can, or cannot, be ‘afforded’.

Privatised control of money issue creates the impression that it is the private market that is creating wealth. Certainly it is making money, quite literally, largely through issuing it to itself as leverage to swell speculative trading. Private ownership and control of money issue has created huge differences of wealth. The mass of the people can only hope for a trickle down of economic activity through the consumption of the champagne-swigging traders and increasing numbers of billionaires. On the illusion that the manipulators of money have actually generated the wealth they gamble with, those playing the money markets demand a huge percentage of the product. The levels of pay and bonuses have become so obscenely puffed that they have become an economic ‘gated community’ set apart from ordinary mortals by their wealth. In fact they have stolen what should be a public resource and harnessed it for private benefit.

Finance Is Not Private

THE FUTURE OF MONEY (1/4)

The global economic crisis in progress has naked the contradictions of privatised finance. If taxpayers have to bolster the system when it fails, why should they not also have control over the supply and allocation of money in the first place?

The UN's Economic and Social Commission for Asia and the Pacific (UNESCAP) painted a grim picture for the region overall in the wake of the global financial crisis

At the height of the financial crisis, the total public financial exposure in rescuing the world’s financial systems was around $15 trillion – a quarter of world GDP. Most of this was not operated, but the existence of public aid prevented a worldwide collapse of financial institutions. This vital role of the public sector has in practice been ignored, as the surviving banks return to the bonus culture, benefiting from reduced competition and additional state support through, for example, quantitative easing/ facilitation (increased money supply).

Not all states could support their bloated financial sectors. Iceland collapsed with financial commitments up to ten times its GDP. Britain, with a financial sector worth around five times GDP, could have faced similar problems. Globally the financial sector eclipses world GDP by at least ten times.

Why do governments feel compelled to spend uncountable billions rescuing the banks and financial sector when other businesses are often left to fail? The answer is that the financial sector is not a private sector at all. It embraces a public function, the issue and circulation of money – something that has been appropriated by private capital.

The contemporary banking and financial system has appropriated this public doings for its own benefit. However, when the financial system goes into crisis, the need to retain this public function means that it becomes a liability on the public, as represented by the state or equivalent monetary authority. As John McFall, chair of the UK Treasury select committee, wrote (Guardian, 9 January 2009):

 ‘After the extraordinary self-induced implosion of the financial system, the future of the market system now rests in the hands of governments. The politicians are the only show in town.’

The financial crisis and the public response have revealed both the instability of the global financial system and the importance of a public monetary authority of last resort.

The latter half of the 20th century saw a rapid growth in the financial sector as people became entangled in debts (particularly consumer debts and mortgages), as collective and public financial security was abandoned in favour of personal investments (particularly pensions), and because there was benefit to be had from inflated financial assets (particularly housing). Even institutional investors were tempted by the promise of higher profits in the most speculative areas, such as hedge funds.

With such a large proportion of the population entangled in the financial system, a demand for public rescue became more likely. A collapse in the financial system is much more threatening to social order than failures in the productive sector. If one factory fails it does not automatically close the rest (they may even benefit from less competition). But if a bank fails the panic threatens to become systemic as people lose confidence in the banking system. This alone was a major reason why states had to get involved.

The need for state intervention has exposed the contradictions of financialised capitalism and its reliance on ‘Wall Street socialism’. A pivotal point was the rescue of the US investment bank Bear Stearns. The US monetary authorities were not only bailing out the retail banks, but finance capital as well. When the US Treasury later tried to isolate the investment sector by letting Lehman’s fail, there were nearly fatal consequences for the banking sector. The financial sector was so interconnected that a crisis of default in the US subprime sector could bring down a relatively small bank in the UK, France or Spain via the functioning of the global money market and the drying up of credit.

Do Reforms Inhibit or Support African Development?

THE AFRICAN GOVERNANCE CRISIS (4/4)

After the analysis of decades  of public sector reform in Africa with special focus on Ghana, one can draw the conclusion that the  external support during the 1980ies has been  vital,  but  to  some  degree  harmful  due  to  a  “faulty  diagnosis  and  prognosis” (1). The African public sector during that time cannot be described as too big, but as expanding. This growth was a direct result from the new-won independence and was therefore a necessary step of taking control.

In order to overcome the economic decline in the 1980ies African states were dependent on foreign investments. While the IMF, the World Bank and individual donors did provide the money, they also set unfitting goals and an unrealistic time schedules. Instead of strengthening the existing system of public administration, Western NPM methods of downsizing, retrenchment and cost cutting were introduced. As has been stated in the above, African states did not have an oversupply of qualified civil servants, but a demand for the latter. Instead of ensuring their loyalty and providing a better education for them, many positions were cut and the crucial increase of salaries was implemented with reluctance (2).

The results of these reforms of the public administration of the 1980ies in Ghana and other countries were modest to say the least. From a different point of view, one could even assert that they were modest from a short-term perspective, but fatal in a long-term perspective, because they focused on technicalities in order to save money – that actually weakened the civil service (1) and ignored the core aspects of successful public sectors. While it might make great sense to concentrate on cost-cutting and downsizing of the public administration in Western countries like the UK or  Germany – where  a  certain ethic belief may  be  attributed  to  the  public officials because of centuries of institutionalized rules and norms – African bureaucracies were nowhere near this point of development. If one observes the economic progress of Asian tiger states whose economies greatly strengthened during the past decades, one is also able to attribute this success to strong systems of public administration (3).

As there is no such history in African public management, it seems obvious that an emphasis has to be laid on the establishment of civil service ethics and accountability. One could conclude, that the reforms of the 1980ies in Africa skipped one step, because they  aimed  at  shrinking  something  that  wasn’t  even  stable  to  begin  with.  Only technicalities were at focus. Therefore, one is drawn to argue that reforms from this time period inhibited the development of committed reformers in Africa.

Of course, this statement must be handled with care, as one does not have the possibility of comparison with an African country that did not follow the NPM reforms at all. However, cutting costs at the wrong places led to the “unfolding challenges” (4) African countries encountered during the 1990ies and even in the new millennium. While techniques for more ethical behavior and accountability are decided on, their implementation must be coordinated among the African states. Instead of relying on external help, the more successful countries have to set an example and support  the weak links.

Dealing with these problems, the UN concludes:

“For poor, resource-constrained countries, the reform challenges are daunting, not because the countries do not know what to do, but because they lack the resources to initiate and sustain a comprehensive programme of change.” (4)

Financial aid is thus still vital today. But instead of forcing these different systems to adapt Western ideals of public administration reforms, the support should be engaged on the  education  of  civil  servants,  hence  human  capacity  building  and  training.  In combination with a rise of public official salaries, the two core weaknesses identified in this work would be tackled. While the downsizing of the public sector has already taken place, one could attempt to stabilize this system now. Therefore, the current trend of African civil service reform can no longer in any way be attributed with an inhibition of the countries’ development.

On the whole, it has been clear that the reforms of the NPM-wave during the 1980ies did   little   to   promote   sustainable   development   in   African   public   sectors   and consequently in the countries’ economies (1) (2). Despite these negative experiences and the sentiment of wasted money, external support is a sine qua non in Africa now. The necessary strategies can only be implemented after the application of sophisticated analyses and diagnoses and with the involvement of all stakeholders, especially the civil servants in regard to more ethical behavior (2).

Only by doing so, policies – such as the liberalization of markets, vital for a more successful participation in global trade – can be implemented.

In order to highlight the difficulties encountered by Ghana and other African states in establishing an efficient and sustainable civil service resulting in a stronger economic development, this paper concentrated on the introduced governance crisis (2). However, there are of course great interdependencies between the public administration and the central government of a country. The best governance system would only get so far without a stable, organized and constitutional government (4). It would be interesting to analyze these realities for African states, as it seems logical that weak governments are another trigger for underdevelopment.

On the whole, one can conclude that reforms of the 1980ies were not customized for African   developing countries and most probably inhibited a quicker economic development. The second  wave of reforms however, is much more focused on the involvement and training of civil servants, which is – as seen in the cases of Developed Countries and Tiger States – crucial for a stable public  administration and economic growth. If provided with the necessary financial aid, reform-committed African states like Ghana could indeed face an overcome of economic underdevelopment.

Related posts:
· The African Governance Crisis (1/4) · A sift inventory of Africa’s development problems
· The African Governance Crisis (2/4) · The Consequences of Reforms on the African Civil Service
· The African Governance Crisis (3/4) · Rehabilitating the African Civil Service
· Millennium Development Goals: Fragile states claim summit outcome off-target

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(1) Olowu, B. (1999). Redesigning African Civil Service Reforms. In: The Journal of Modern African Studies 37, 1 (1999). Cambridge University Press.
(2) Adamolekun, L. (2005). Re-Orienting Public Management in Africa: Selected Issues and Some Country Experiences. In: African Development Bank – Economic Research Paper Series No. 81.
(3) Evans, P. (1995). The State as Problem and Solution: Predation, Embedded Autonomy, and Structural Change. In: Politics and Society.
(4) United Nations. (2005). Public Administration and Development – Report of the Secretary General.

Rehabilitating the African Civil Service

THE AFRICAN GOVERNANCE CRISIS (3/4)

The customary  problems  of  public  sector  ineffectiveness  due  to  erroneous  reform movements – leading to a reduction instead of a reinforcement of the system – and the ongoing  danger  of  corrupt  public  officials,  give  reason  to  speculate  about  more successful policies for the reinvention of the African public administration. In order to do so, public service ministers came together in Stellenbosch, South Africa in 2003 to respond to “unfolding challenges” in African public administration (1).

In accordance with some reform approaches of the late 1990ies, the aim of new reforms is to switch to home-grown and demand driven methods directed at specific problems and challenges instead of the donor-pressured goals of broad downsizing and cost- cutting (1). While the UN observes that contemporary reform methods do still aim to improve business and customer satisfaction techniques –“a  carry-over from the early days  of  New  Public  Management”  (1),  intangible  reform  topics   such   as  the implementation of norms and values as well as public service ethics and accountability play a vital role.

Since African countries like Ghana do not possess the financial assets necessary for a much needed rise of public servant salaries, it seems crucial to at least stabilize the employees feeling of normative obligations. Despite negative experiences citizens have encountered with corrupt public officials so far, the latter must still be expected to have a  special  awareness  for  accountability  since  they  belong  to  the  directly  elected government of the country (2). Von Maravic argues that ethics in public management influence the quality of decisions made in public administration as well as the trust the citizen has in the system. (3). Hence, if one could ensure the ethical comportment of public officials, African (and more precisely Ghanaian public administration) could highly improve.

However, at this point another problem must be faced: the lack of resources. In this way, the UN states:

“In many countries, public administration remains weak largely owing to a shortage of human resources and to deficiencies in staff training and motivation.“ (4).

When speaking about the amelioration of African public services, one must be cautious not to attempt to apply the same public sector reform logic to all African countries. The differentiation of Adamolekun provides a possible classification of African states that has been mentioned before when referring to Ghana as a reform-committed country.

The above  table  or  a  similar  one  could  be  used  in  order  to  ensure  a  sustainable improvement  of  African  public  administration  systems.  In regard to this, the UN highlights the necessity of information sharing among reforming African states (4). Implementing the homegrown, but still NPM influenced methods of public sector reform in combination with the support of ethical and accountable changes in countries of the “virtuous circle” could be a first step (5). While the public service ministers all attempt to work on similar criteria they must accept countries like Botswana, Namibia or South Africa as a ‘primus inter pares’and a focal point of orientation. Moreover, it is obvious that foreign investments are still necessary; however one must not repeat the mistakes of the 1980ies and let donor schedules pressure the implementation of reforms.

Related posts:
· The African Governance Crisis (1/4) · A sift inventory of Africa’s development problems
· The African Governance Crisis (2/4) · The Consequences of Reforms on the African Civil Service
· Millennium Development Goals: Fragile states claim summit outcome off-target

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(1) African Press Organization. (2008). 6th Conference of African Ministers of Public Service Opening Remarks.
(2) Solinski, H.M. (1993). Ethic-conscious outlook behavior in public administration in Switzerland. Considerations and suggestions for the introduction of an ethics understanding based on the American experience. Reports and contributions of the Institute for Business Ethics at the University of St. Gallen.
(3) Von Maravic, P. (2009). Ethical challenges in administrative action. 5/4/2009.
(4) United Nations. (2005). Public Administration and Development – Report of the Secretary General.
(5) Adamolekun, L. (2005). Re-Orienting Public Management in Africa: Selected Issues and Some Country Experiences. In: African Development Bank – Economic Research Paper Series No. 81.

The Consequences of Reforms on the African Civil Service

THE AFRICAN GOVERNANCE CRISIS (2/4)

 “Since the late 1980s, many African countries have been reforming their civil services (…) Unfortunately, these reforms have not been very successful because of faulty diagnosis and prognosis. They have failed to tackle the major problems confronting African civil services.” (1)

Before the analysis of African public administration reforms can be undertaken, one must remember that the landscape of Africa’s civil service was not build from scratch. With its independence from British colonial rule, countries like Ghana inherited a system of public management that fulfilled tasks of “assuring the continuity of the state and maintaining law and order” (2). However, the civil service was doomed to re-orientate after independence in order to follow national interests instead of the ones of former colonial rulers. The African Development Bank thus asserts  that  an  enormous  expansion  of  the  civil  service took  place  until  the  grave economic decline at the  end of the 1970ies leading to a full-scale development crisis (2). This is when reforms of the civil services this paper aims to concentrate on were launched. Ghana shall be utilized as a hands-on example in this work, because it may be identified as a reform-committed country (2) that demonstrates strong efforts to rehabilitate its public service despite tremendous economic shortfalls. Therefore, a lack of commitment can be dismissed as a possible inhibiting factor to a successful development of Ghanaian public administration.

The goal of the following chapter is thus to properly understand why policies from the 1980ies aiming at the economic stabilization and development of African states such as Ghana have shown little success (1). One of these policies is the liberalization African markets (3). Taking this as the initial point of  this  work’s  analysis,  one  is  more  likely  to  comprehend  the  nature  of  reforms launched  during  the  1980ies.  The question whether the latter actually inhibited or actually reversed Ghanaian administrative, hence ultimately economic progress shall now be at focus.

NPM-Waves in Africa

Influenced by donor countries providing the necessary financial support for reforms (4), the ideal of New Public Management began gaining ground as a leitmotif for reforms in Ghana and other SSA countries. In general one can follow Bamidele Olowu in asserting that “African civil services [were] originally modeled on their metropolitan precursors.” (1). Although New  Public Management does not  translate  into  the  same  dogmatically  closed  catalogue  of  instruments  in  every country, in this work NPM shall be understood as a business interpretation of administrative action, hence a trend toward micro economic behavior in public management.

According to Peter Evans, this phase of reforms in developing countries may be seen as market-centered (5). After decades of viewing the state as the ultimate instrument of development, reforms in the 1980ies were initiated under the sentiment of negative experiences with the central government, hence a thrive for a reduction of the state.

As mentioned before, Ghana like many other African countries experienced a great expansion of the civil service sector after the 1960ies (1). After the global oil crisis, African economic decline and the ideal of a business-oriented reform wave  of  the  public  administration,   this   growth  of  the  state  was  to  be  ended (2). Donor countries provided African states with the necessary financial aid for the cutback of civil services (4). To make this more accessible, one must look at some exact data, in this case from Ghana.

The shrinking of the Ghanaian public administration was tackled through a myriad of reforms steps. The most important ones for the analysis in this paper are as follows. A grand movement of organizational restructuring led to a reorganization of government ministries eliminating four agencies during the reform efforts. Hence, seemingly unnecessary agencies were cut.  Another method, which was very well received by donor countries, was Ghanaian retrenchment. The core goal of this policy may be seen in the cutback of unneeded civil servants in order to shrink the countries’ public administration system. Therefore, Ghana reduced its civil servants from 131 089 in 1990 to 80 000 in 1995 (1).

Despite the reduction of civil servants, the payment of the latter was to be increased. Therefore Ghana foresaw decompressing wages and providing higher salaries for public managers. While information on the actual increase varies depending on the source, it is safe to say that actual salaries in Ghana did not rise significantly. Although still higher than for many African countries, the increase during the reforms in Ghana was modest (2).

These three aspects of Ghanaian public sector reform are sufficient for the following line of argumentation. However it shall be noted that Ghana was also at the forefront in regard to privatization and decentralization of public services (1). Due to its British past and organizational influence, reforms like the latter were faster implemented than in other African countries (1).

Evaluation of the NPM Reforms in Africa

The crucial part now lies in the evaluation of the New Public Management reforms and their effect on policy-making capabilities of the African civil service.

As mentioned above, the size of the Ghanaian public administration was decreased in regard to the number of agencies as well as the number of employees. Donor countries favored this approach due to  the conviction that a smaller public sector would work more  efficiently  as  for  instance  experienced  in  the  UK  (3). Moreover, the state’s involvement was seen as one of the core problems in developing countries after the 1970ies (5), thus the idea of a roll back of the state was widely popular (6).

However, the African civil service was never abnormally big in comparison to other regions (1).

      Figure 1: Government Employment as a Percentage of Population (various recent years)

Source: Olowu, 1999, p. 9.

As visible in the above chart, the central as well as the local government in sub-Saharan Africa is much smaller than the OECD average. While the observation that there was an enormous growth of the latter may very well be correct, this must be viewed as a post- colonial necessity. It seems rather logical that a growing economy must increase its public administration capacities. In regard to the number of public employees, the UN states that the African public administration “is significantly understaffed in professional and managerial areas, and perhaps overstaffed in semi-skilled and unskilled areas.” (4).

Therefore, one must conclude that a reduction of Ghana’s civil service at all levels was contra-intuitive and defeating the purpose of a more effective public administration.

The retrenchment in the civil service in general has proven to be more costly than expected in the beginning. More precisely, the research on the proper identification of cost saving possibilities mostly exceeded the actual ex-post cost saving (1).

Ghana is once again a perfect example for this miscalculation as the country actually encountered cumulative losses as a result from downsizing in the 1980ies. Although  Ghana  has  been  classified  as  a  committed  reformer,  the  former  head  of Ghanaian civil service, Robert Dodoo asserted his dissatisfaction in regard to the reform movement. According to him, the reason for the lack of improvement of the country’s development lay in the “donor time-tables, agendas and conditionalities” (7). While external support was necessary and vital for an improvement of the African  civil  service  the  provision  of  money  came  with  unreasonably  short-term expectancies.  It  does  not  seem  surprising  that  a country in  danger  of  loosing  all monetary  support  decides  to   hustle  through  a  reform  and  risk  less  successful implementation instead of the loss of crucial financial aid.

There are two core weaknesses to be identified after this ex-post evaluation of the first part of African civil service reforms: (1) the way reform was embarked upon, along with (2) the goal of the reform.

The first point has been made quite clear with the previous statements of Robert Dodoo. The pressure for success coming from donor countries was in no way beneficial for the improvement of the Ghanaian civil service. As one of many, Ghana had agreed to reduce the cost of the public sector and implement questionable structural adjustment programs: “This was an explicit condition for financial support from the International Monetary Fund and the World Bank.” (2). Although the size of the civil service was reduced, the results in cost saving were modest.

But why reduce the African public administration at all? As demonstrated with the graph, the African civil service was in no way bigger than ones from many other states. While it was indeed expanding after the colonial rulers granted independence, this was a vital step toward a functioning economy and a sustainable development of countries like Ghana. State and market building are mutually dependent; hence a strong state in combination with a functioning market could be seen as the more adequate policy for Africa at this delicate time (3).

The World Bank itself states that

‘An effective  state  is  vital  for the  provision  of the  goods and  services  – and  the  rules  and institutions – that allow markets to flourish and people to lead healthier, happier lives. Without sustainable development, both economic and social is impossible.’ (8)

The problem  of  the  1980ies  believe  that  effectiveness  would  be  achieved  through downsizing is  made clear in the above. However, it now becomes tangible that the effects of the 1980ies reforms may very well have resulted in lacking capabilities to implement crucial policies for the countries’ development, i.e. the liberalization of markets. If there are too few agencies and employees to oversee the realization of liberalization, this process is doomed to fail.

The third reform step that shall be evaluated here is the alteration of salaries in the civil service. While there was indeed some increase in the salaries of civil servants in Ghana, they are still stunningly low (1).  When being confronted with unattractive   employment   opportunities, the reaction of workers is universally comparable. High-qualified human capital either leaves the country in order to find better-paid jobs or the employee opens him – or herself to corruption. A report by the IMF shows a strong correlation between wages in public administration relative to wages in manufacturing: “It is estimated that government wages needed to be 2×8 (…) times higher to make corruption negligible.” (The Economist 1997, Reasons to be venal).

Corruption is another major weakness of African public administration and must be seen as another NPM-influenced repercussion (1). Peter Evans asserts in this regard that methods of personalism and plundering at the top levels of African civil service destroy all possibilities of rule-governed behavior in the lower levels of public administration (5). More precisely, in order to make a living less qualified officials go along the example set at the top.

Another fatal repercussion of corruption for these countries is not only the waste of financial  resources,  but  also  the  cancelation  of  international  aid  programs  as  a punishment (5). Weak public administration with corrupt officials therefore results in a vicious circle for the whole country.

After evaluating the three vital reforms in Ghana, the downsizing of the public sector as well as an insufficient rise of civil servant salaries, in the following, this paper aims at observing some of the latest reform movements. By doing so, the goal is to make a recommendation as to where the development of the Ghanaian and African civil service should be headed in order to guarantee more capable ways of implementing policies for an improvement of the countries’ development.

Related posts:
· The African Governance Crisis (1/4) · A sift inventory of Africa’s development problems
· The African Governance Crisis (3/4) · Rehabilitating the African Civil Service
· Millennium Development Goals: Fragile states claim summit outcome off-target

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(1) Olowu, B. (1999). Redesigning African Civil Service Reforms. In: The Journal of Modern African Studies 37, 1 (1999). Cambridge University Press.
(2) Adamolekun, L. (2005). Re-Orienting Public Management in Africa: Selected Issues and Some Country Experiences. In: African Development Bank – Economic Research Paper Series No. 81.
(3) Chaudhry, K. A. (1993). Myths of the Market and the Common History of Late Developers.
(4) United Nations. (2005). Public Administration and Development – Report of the
Secretary General, Sixtieth Session.
(5) Evans, P. (1995). The State as Problem and Solution: Predation, Embedded Autonomy, and Structural Change. In: Politics and Society.
(6) Goldsmith, M. J. & Page, E. C. (1998). Farewell to the British State? In: Public Sector Reform by Jan-Erik Lane. London: SAGE Publications.
(7) Dodoo, R. (1996). The Core Elements of Civil Service Reforms. In: African Journal of Public Administration and Management
(8) World Bank. (1997). World Development Report. New York: Oxford University Press

A sift inventory of Africa’s development problems

THE AFRICAN GOVERNANCE CRISIS (1/4)

Index of African Governance Human Development © European Statistical Laboratory

The underdevelopment of developing countries and the attempted overcome of the latter are at heart of international debates ever since development politics began gaining ground in world politics in the 1960ies. Today, African states receive special attention in regard to possibilities of an amelioration of their economic status quo.

Core problems  of  these  so-called  Least  Developed  Countries  (LDCs)  are  a  highly restricted  access  to  basic  human  needs  such  as  food,  water,  energy  resources  or medicine.  Moreover “social services and infrastructure have largely collapsed  owing  to  a  lack  of  resources  for  their  upkeep.”  (1). Although the Millennium Development Goal aiming at a worldwide reduction of extreme poverty by 50% is expected to be reached until 2015, this data must be considered with caution in regard to Africa. While countries such as India or China, who are also targeted by the UN agenda  do  indeed  face  an  incredible  improvement  of  public  wealth,  sub-Saharan countries are at risk of being left behind permanently. More precisely, the UN today expects goals such as the reduction of extreme poverty to be reached in Africa no sooner than in 150 years (1).  This vicious circle of underdevelopment is well highlighted in the Human Development Index. From the 1980ies until the end of the millennium 13 of 22 countries that suffered large setbacks were African (1). Among a great number of possible explanations for this economic disaster, one of the most plausible ones is the conviction that “governance and public administration  weaknesses,  [and]  the  failure  to  reflect  poverty  concerns  in  budget allocations…” (1) generate economic gaps. This analysis thus aims to demonstrate that so far weak governance institutions are one of the main causes for the above-depicted underdevelopment of some African countries.

But how exactly does the public administration system of sub-Saharan LDCs affect their (economic) development?

Many theories regarding the economic improvement of these poorest countries have been launched and abolished. Sub-Saharan Africa (SSA) has been at the receiving end of a myriad of developmental experiments ranging from modernization concepts to self-help and good governance approaches. The core train of thought driving these, mostly Western models of development, has been the ideal of market liberalization (2) as  a  motor  for development.  But  what  is  often  forgotten  when  dealing  with  the  approach  of  free markets is the vitality of  strong governance institutions. Kiren Chaudhry and Peter Evans acknowledge that market building and state building must go hand in hand (2)(3). More precisely, they hereby avert from the idea of a simple roll back of the state of New Public Management (NPM) reforms launched during the 1980ies (4).  The UN General Assembly corroborates: “With challenges of poverty and growing inequality (…) organized and constitutional Government becomes the only guarantee of personal and collective security.”  (1).

Although development aid or development strategies in general may have fallen into some disgrace during the last decades due to little trickle down effect and images of corrupt African leaders wasting  Western money for their personal pleasure,  increased  financial  aid  might  be a sine qua non at this crucial time of development of African governance institutions. A lack of financial resources leads to dramatic human capital flight in the African public administration (1). Further, NPM-like cuts in administrative resources in order to minimize the size of African public management could have led to a setback and to less development in the target countries.

The reforms of the civil sector in Africa so far have been mainly concerned with technicalities, such as the reduction of the size and the cost of the public sector (5).

However, this approach fails – as I shall argue later in more detail – to comprehend the crucial task of building lasting human and institutional aptitudes.

This contribution therefore aims to concentrate on the civil service sector of underdeveloped sub-Saharan countries. Questions such as: ‘What kind of reforms were implemented?’ must be answered before diving into the complex task of evaluating the latter and discussing a different approach to possible improvement in the civil service, hence in the countries’ development. Thus, in a first step, this paper will focus on some major reforms in reform-committed African countries such as Ghana and underline the weakness of the attempts to change the system of public management (6).

A second step will then be dedicated to suggestions of a new direction for the handling of the African public administration.

In a last step, this paper then aims to draw a conclusion and answer the initial question whether public sector reforms in Africa so far actually inhibit or support development.

Related posts:
· The African Governance Crisis (2/4) · The Consequences of Reforms on the African Civil Service
· The African Governance Crisis (3/4) · Rehabilitating the African Civil Service
· Millennium Development Goals: Fragile states claim summit outcome off-target

______________

(1) United Nations. (2005). Public Administration and Development – Report of the Secretary General. Sixtieth Session.
(2) Chaudhry, K. A. (1993). Myths of the Market and the Common History of Late Developers.
(3) Evans, P. (1995). The State as Problem and Solution: Predation, Embedded Autonomy, and Structural Change. In: Politics and Society.
(4) Goldsmith, M. J. & Page, E. C. (1998). Farewell to the British State? In: Public Sector Reform by Jan-Erik Lane. London: SAGE Publications.
(5) Olowu, B. (1999). Redesigning African Civil Service Reforms. In: The Journal of Modern African Studies 37, 1 (1999). Cambridge University Press.
(6) Adamolekun, L. (2005). Re-Orienting Public Management in Africa: Selected Issues and Some Country Experiences. In: African Development Bank – Economic Research Paper Series No. 81.

High Food Prices Endanger Food Security

Along with officers from the Food and Agriculture Organization, mankind is only two bad seasons away from a disaster on a global scale.

This spring already, the previous year’s deficient harvests contributed to the social unrest in North Africa. Even though the World Bank asserts that rising food prices have not initiated the protest movement in the Arab world, the price ramble however contributed to an intensification of tensions. Exploding prices are a main headache for political and economic decision-makers across the globe. One thing is clear: A search for solutions needs to be made a top priority.

The developments in the markets over the past year certainly give full reason for concern: Within the past decade, prices for agricultural goods rose by 83 percent. In 2010, inclement weather proved a major challenge for food security: In the spring, heavy rainfall in Canada destroyed a quarter of the wheat harvest. During the summer drought and bushfires in Russia, the Ukraine and Kazakhstan lowered yields. In China drought and sandstorms have made life difficult for farmers ever since last spring and significantly decreased their income from wheat sales. In early 2011, strong snowstorms threatened winter wheat plants in the leading export nation, the United States. In the southern hemisphere in 2010, La Nina led to drought and losses for soya beans and maize plantations. Floods in Australia made half of the planted wheat there unfit for human consumption. The wheat price has doubled since last summer. Lower wheat supplies led consumers to switch to maize. The maize price shot up by 73 percent as a result in the second half of the year. Meanwhile numerous Mediterranean countries like Egypt, Algeria, Morocco, Lebanon, Jordan, Libya, and Turkey have engaged in panic-buying and hoarding large stocks of wheat. China is expected to follow suit sometime later in 2011. This will further push up prices in the world markets. It is not only climate change and the bad weather that is responsible for the increasing shortage of food stuffs. In many emerging countries, changing consumption patterns – especially increased reliance on meat as a dietary source – encourage prices escalate. Moreover, additional agricultural land is lost to planting crops for biofuel instead of food stuff. According to the International Food Policy Research Institute, one third of the price rise needs to be attributed to the increasing use of grain as a biofuel.

Despite these disquieting numbers, it is not predictable that the United States, the European Union, or Brazil will in the short-term abandon their biofuel projects. Neither can consumption patterns worldwide easily be changed. The developments observed therefore point that supply shocks caused by bad harvest today can more easily upset the delicate balance in the increasingly globalized food chain. Structural changes render it difficult for the system to deal with such shocks at the present time. In order to prevent further upset on the supply side, much more investment in agriculture is needed today. It is necessary to be better prepared for the challenges posed by climate change. It is high time to coordinate on a global level in order to stabilize agricultural markets in such a manner that external supply shocks will not automatically lead to systemic consequences and social unrest.

Shadow banking: still big, still dangerous (3)

A lot of attention has been focused on the work of traditional banks amongst the recession. But according to some measurements traditional banks lent only 40% of the money in the economy prior to the credit crisis. Shadow banks were responsible for the other 60% of lending and securitized a large portion of those loans.

The part of the financial system that lends the most money to Americans remains
almost untouched by regulation. It’s shadow banking, as Paddy Hirsch explains.

There is a strong consensus that the main fault which led to the current crisis was the total deregulation of the banking system. A banking system which in recent decades created a parallel clone to conventional banking, fully interconnected to global financial system, but disconnected from real economic activity. That parallel universe that found the financial industry to carry out the traditional role of linking savers with borrowers, had a huge increase in recent decades, as shown by the blue line on the graph. That is what is known as the “shadow banking system.”

This system is in the heart of the current financial turmoil and, according to the latest report of the New York Fed, is still larger than the traditional banking system. According to Fed data, there are still U.S. $ 16.000.000.000.000 (16 billion) sloshing around the financial system of the U.S. banks, polluting the world banking. The figure is greater than the entire GDP of the United States and it is remarkable to note its powerful boost since the 80s.

The shadow banking system gave rise to many of the issues that triggered the current crisis, and the report offers a detailed look at how the system did its job. First, the volume of credit grew bigger on the shadow banks than in retail. Before the crisis outbreak the shadow banking system had a $ 20 million liabilities compared to $ 10 billion of retail bank. Securitized loans, CDOs, CDS, the market for mutual funds, stock bubbles, are at the heart of this great legal fraud that allowed the existing self-regulation, as it provided huge inflows of money to keep the system moving.

The fragility of the system was demonstrated when its brutal collapse arose. But while the housing market crash was only the catalyst of the financial crisis, the sharp phase of the crisis was defined as a bank run on the shadow banking system in late 2007 and early 2008. Anticipating the crisis, all investors and lenders tried to recover their money at the same time. This is because on the shadow banking system – in contrast to retail banks – money is only paper – i.e. not backed by any real assets. Hence the strong bank run that sank Bear Stearns and Lehman Brothers before the monetary authorities were aware on what was happening in the market, despite Fannie Mae and Freddie Mac were knock down already. The fall of Lehman, in any case was the warning sign that the whole system collapsing and that the breakdown was imminent.

Fed specialists realized overdue this great market failure and the dangers that most of the system operates without any regulation. The bottom line is that if shadow banking is vulnerable too to financial runs that can produce a collapse of equal or greater magnitude than the retail bank runs, then it is reasonable to consider that shadow banks should also be regulated. Their failure has provoked a colossal damage to the entire world economy.

Related Posts:
Part 1 – Financial turmoil and global unemployment.
Part 2 – Ponzi Scheme and Global Finance.

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Ponzi Scheme and Global Finance (2)

For decades the whole U.S. economy has been structured as a pyramidal fraud under the “Ponzi scheme”.

Haga click aquí para la versión en Castellano.

Since the U.S. is the dollars printer, it generated a huge bubble which in turn ramified into a huge debt that cripples the world today. The financial mess that we now live, whether it is a tsunami or a perfect economic storm, is the result of unsuitable monetary and fiscal policies of the dominant reserve currency. As a blogger assesses in connection with a talk by Robert Solow: “The lesson that should be drawn is therefore that the real economy should be somehow shielded from the instabilities of the financial system.”

There is little hope on a quick return to fiscal and monetary discipline everywhere. At present, each and every one is in the midst of the storm without a compass or rudder. And we should not expect to keep banging with the oars. Nobody has accurate answers on the future action plans. What is known is that in January there were 550 000 unemployed again in the U.S., and that the rate will go on rising until year end. The Obama administration would give rise to 250,000 jobs per month – this figure is lower than job destruction – so employment will get higher, with the impact this has on the demand and consumption.

The Ponzi scheme developed in the financial markets have collapsed. And the culprits are still handing out awards such as the $37 billion that were distributed to top executives in December 2009. That’s why we lost faith in the financial system. And the famous phrase that comes on every dollar “In God We Trust” is now the subject of derision when for every dollar you give many people a few cents.

More than 40 years ago the economist Jacques Rueff, anticipated that an “uncontrolled U.S. deficit could destabilize the entire global economy.” Rueff ‘s vision was that issuing the U.S. reserve currency could incur in massive and unlimited deficits, forcing as well the creation of money in other countries to accumulate dollar reserves that, once entrenched, would come back to the U.S. in order to earn interests and give extra occupation to the greenbacks printer.

Now, the only clear way to stabilize the world’s economy and control social over-running is the creation of a world central bank and the return to a single reserve currency. For centuries gold was this reserve currency, allowing internal reckoning and external deficit control without losing real resources. It is not a matter of coming back to gold standard but to prove an anchor currency satisfying the requirement to provide a secure and stable environment – while allowing countries with the real concern of full employment. A reserve currency that can help bringing stability to a system that has collapsed and which repair will take a lot of time. If you do not believe it, look at this interactive graphic.

The Ponzi scheme collapse plunges dollar and the US economy

During the last decades, one of the main driving forces of global economic prosperity was the increase in debt and in financial design of the Ponzi scheme. Much of the growth occurred since the 80s but mainly from the 90s, was driven by the generous credit lines to governments, businesses and consumers used along this support. Well, no doubt, the crush of Ponzi scheme and the subsequent shadow banking system, have set in motion the collapse of the United States.

With the Ponzi scheme, a large number of people stretched to such limits debt choking the burst. For many, debt allowed the biggest party on earth – as through the “crazy years”, that period of loose waste in the 20s, which ended abruptly with the Great Depression in 1929. In those roaring years, the optimism of inventions like the airplane and the radio generated a huge level of debt aimed rather at waste than at investment. Hence, one of the causes of that crisis is endorsed by slam on brakes to credit and by the strong increase in the interest rates propelled by the Fed as a way to contain the waste. We already know how that ended: the entire economy collapsed and it took ten years and a World War to recover.

Today, things are awfully similar. The economic system based on debt was greatly dependent on it to create a parallel economic system, which from the shadows, swallowed us all. Except that the New York Fed was slow to take seriously the problem of parallel banking system, discovering that, before the crisis broken in July 2007, the shadow banking liabilities were twice the real banking charges –  70% of world’s GDP.

That is why this crisis is severe enough and will be here a while. So do not be surprised if dollar continues to slide down. That’s what’s coming. Fixing the Yuan to the dollar was the sole breadwinner in the last two years. However, a dose of that poison named indebtedness, may help resolve things if applied rigorously in generating employment. No way to do it however even though employment is the only variable that can boost demand and begin to move ahead the real economy machinery.

The collapse of the shadow banking system has paralyzed the first economy in the world: the U.S. certified unemployment is 10% (the real climbs to 17%), retail sales plummeted, and property sales have fallen to their lowest level in 50 years. United States faces a deficit of $ 1.6 trillion, a debt of $ 16 trillion and a total debt of $ 60 trillion.

With these data, there is no system that works, mainly if it has been for massive bad habits and waste. United States is in the early stages of a financial implosion that will make history. Since late last year, Europe saw the markets were obsessed with the sovereign debt crisis of the European countries. Well, we now enter a new phase: the alarm bells of the global economy big ship just starting to sink.

Related Posts:
Part 1 -  Financial turmoil and global unemployment.

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even though

Financial turmoil and global unemployment (1)

This August marks another anniversary of the origin of financial chaos that swept the world in overall unemployment drift.

Haga click aquí para la versión en Castellano.

Unemployment rate 2009 © Publico.es

Abandoning the gold standard on August 15, 1971 is closely linked to the mass unemployment experienced by industrialized countries. Until then, the dollar was as close as possible to gold, and all nations were trying to maintain a constant balance between exports and imports. Most countries devised ways to export more than they imported, so as to accumulate gold reserves or, otherwise, U.S. dollars – according to the treaty of Bretton Woods in 1944 – could be exchanged for gold.

Unlike the rest of the world, America was not particularly concerned about maintaining a balance between exports and imports since, as under the Bretton Woods Agreement, the US would pay export deficit sending more dollars to creditors. As it was the sole source of international currency, the U.S. had a clear advantage over the rest of the world: it was the only country that could pay its debts by printing money. Something that the rest of the world did not matter a little: the dollars were a seductive line of credit that allowed access to the key casino in the market. No one took into account that the gadget also had limits.

So it was when, at the end of the Second World War, more than 20,000 tons of gold that the U.S. owned dwindled year by year while many countries (especially France) insisted convert dollars for gold. This situation came to an end in 1970 when two unexpected phenomena put the U.S. government on the wrong foot: the upcoming oil crash (a situation that forced the U.S. to import oil instead of export until then) and the adverse outcomes of war in Vietnam. Both events brushed away the US gold reserves and pushed the country to bankruptcy. The benefit it had to hide its bankruptcy was clear: being the owner of the dollars printing press.

In the early months of 1971, Henry Hazlitt and Paul Samuelson urged the Richard Nixon administration to devaluate the dollar sharply as it would need to increase the amount of dollars it would take to get an ounce of gold from the U.S. Treasury. But Nixon did not take their advice into consideration and followed the suggestion of Milton Friedman who advocated the idea to let floating freely the dollar and eliminate the dollar-gold convertibility into  – as the international currency was worth at the very back offered by the U.S. government, the global economic locomotive. Thus Sunday morning August 15, 1971, Richard Nixon declared the dollar-gold inconvertibility, so he unilaterally broke the Bretton Woods agreement.

Since then, the whole world trade has been accomplished using the dollars printed by the U.S. Treasury, which is nothing more than fiat money, i.e. easy papers. Up until then, international trade was valid as it was backed by gold; from that moment onwards, trade depends on a fiat money produced by the major press in the world. The consequence of that fateful day was that all countries (that could do so) began to accumulate dollars as an unrestrained U.S credit expansion – without the restrictions imposed by Bretton Woods. The rest of the world had to accumulate dollar reserves and these reserves had to be ever increasing, since the slightest sign that a country’s reserves fell, woke currency speculators who could attack that country’s currency and destroy it with a sharp devaluation.

The increasing flow of dollars throughout the world prompted the global credit expansion, which only stopped the speed in August 2007, after exhausting all instances of what is called the ponzi scheme (1). The international banking elite always strove to devise mechanisms for higher profits and to extend credit. A provision that was released from the restriction of having to pay international accounts in gold, and that scored the U.S. trade boom.

Until the ’70s, a poor country like China had no interference with world trade: it sold low and bought little. The globalization of the 80s, provided by this extension of counterfeit money, offered great facilities to companies in search of cheap labor, they set up their factories in China. This was the beginning of the industrialization process that began in the U.S. and went on with Europe. A process which destroyed jobs in the industrialized countries as never seen before. A no return pathway.
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(1) A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

Related Posts:
Part 2 -  Ponzi Scheme and Global Finance.

______________________________

German households are more indebted than Greeks

Pulse aquí para la versión en Castellano.

The plan to destabilize the euro area starting with Greece, had well known origins.

German households are more indebted than Greek citizens, according to this chart with data from Eurostat and the European Central Bank published 16 May by Bloomberg.

This was one of the main points discussed during the marathon hours to rescue the European single currency. Until then, a rumor went around that the Greeks were always a country of “wasteful” and “lazy” citizens. Data show however that things are not as some claim to see them. And while Greece is one of the countries with higher debt as a GDP share (white), household debt is highest in Germany (red). And much more in the United Kingdom, Portugal and Spain.

As a percentage of GDP, the overall Greek debt is greater than the debt of Germany, but lower than the debt of Ireland, Portugal, Spain and Italy. The following chart shows the levels of public, private and firms debt for the major euro area countries. As Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris said in an interview:

“Greece is a relatively rich country but with an impoverished state.” (However), “Greece does have the means to repay its external debts, especially when you add in the private sector”

The rescue package which Chancellor Angela Merkel had to be pressed by France, Italy and Spain for approval, comes to € 928 000 million and guarantees payment of sovereign debt of countries in trouble over the next three years. In exchange for aid, governments are pushing through budget cuts that Greece’s labor unions have called “savage” and “unjust.” These wage cuts correspond to the second myth created around Greece: the laziness of its people.

A survey conducted by the OECD, from 1995 through 2008 (the most recent year for which such data is available) shows that the Greeks are far from being the most lazy. They are among the hardest-working (they are above the average of OECD countries and are only under Korea). In this regard, I suggest seeing this interactive OECD graphic, — which can be reviewed for the last fifteen years. This belies the Greek myth of laziness, while demonstrating the steep slopes of competitiveness within the EU. These large gaps in productivity demonstrate the absence of an overall EU plan.

According to Bloomberg, the delay of Germany to support the bailout of the European currency was the product of the myth of laziness and waste of the Greeks. Against that, the Germans were unwilling to support a country of slackers and wastrels. The figures, however, say something very different and this accounts for the real big problem for the EU: the lack of a sense of integration and the ignorance of the realities of the neighboring countries. Greece work more than average (2,120 hours per year, versus 1430 hours for the Germans), but it is one of the poorest countries, and it is in addition sentenced to further impoverishment because of the rescue plan. This shows the great breaking point and inequality edge  in the valuation of work in European countries. Monetary union, like any monetarist plan, has been more artificial than real and has not allowed a real economic integration. This is one of the key elements that the EU should settle if it is still looking for a common future.

The Art of Waste Management (2)

Visual pollution, illegal dumping, wild beach Oceania · © South Images

Key Benchmarks for Assessment

There are a number of concepts about waste management which vary in their usage between countries or regions. Some of the most general, widely-used concepts include:

1. Waste Hierarchy: The waste hierarchy refers to the “3 Rs” reduce, reuse and recycle, which classify waste management strategies according to their desirability in terms of waste minimization. The waste hierarchy remains the cornerstone of most waste minimization strategies. The aim of the waste hierarchy is to extract the maximum practical benefits from products and to generate the minimum amount of waste (Wikipedia 2008).

2. Extended Producer Responsibility (EPR): This is a strategy designed to promote the integration of environmental costs associated with products throughout their life cycles into the market price of the products (Organisation for Economic Co-operation and Development 1999).Extended producer responsibility imposes accountability over the entire life cycle of products and packaging introduced on the market. This means that firms, which manufacture, import and/or sell products and packaging, are required to be financially or physically responsible for such products after their useful life. They must either take back spent products and manage them through reuse, recycling or in energy production, or delegate this responsibility to a third party, a so-called Producer Responsibility Organization (PRO), which is paid by the producer for spent-product management. In this way, EPR shifts responsibility for waste from government to private industry, obliging producers, importers and/or sellers to internalise waste management costs in their product prices (Hanisch 2000). A life-cycle perspective is also taken in Extended Producer Responsibility (EPR) frameworks: “Producers of products should bear a significant degree of responsibility (physical and/or financial) not only for the environmental impacts of their products downstream from the treatment and disposal of their product, but also for their upstream activities inherent in the selection of materials and in the design of products” (Organisation for Economic Co-operation and Development 2001). “The major impetus for EPR came from northern European countries in the late 1980s and early 1990s, as they were facing severe landfill shortages. EPR is generally applied to post-consumer wastes which place increasing physical and financial demands on municipal waste management” (Environment Protection Authority New South Wales 2003).

3. Polluter Pays Principle:  In environmental law, the polluter pays principle is the principle that the party responsible for producing pollution should also be responsible for paying for the damage done to the natural environment. With respect to waste management, this generally refers to the requirement for a waste generator to pay for appropriate disposal of the waste. Polluter pays is also known as extended polluter responsibility (EPR). This is a concept that was probably first described by the Swedish government in 1975. EPR seeks to shift the responsibility dealing with waste from governments (and thus, taxpayers and society at large) to the entities producing it. In effect, it internalises the cost of waste disposal into the cost of the product, theoretically meaning that the producers will improve the waste profile of their products, thus decreasing waste and increasing possibilities for reuse and recycling (Wikepedia 2008). Organisation for Economic Cooperation and Development defines extended polluter responsibility as:
A concept where manufacturers and importers of products should bear a significant
degree of responsibility for the environmental impacts of their products throughout the product life-cycle, including upstream impacts inherent in the selection of materials for the products, impacts from manufacturers’ production process itself, and downstream impacts from the use and disposal of the products. Producers accept their responsibility when designing their products to minimise life-cycle environmental impacts, and when accepting legal, physical or socio-economic responsibility for environmental impacts that cannot be eliminated by design (Organisation for Economic Co-operation and Development 2001).

4. Zero Waste: This is a philosophy that aims to guide people in the redesign of their resourceuse system with the aim of reducing waste to zero. Put simply, zero waste is an idea to extend the current ideas of recycling to form a circular system where as much waste as possible is reused, similar to the way it is in nature (Wikepedia 2008). Zero waste requires that we maximize our existing recycling and reuse efforts, while ensuring that products are designed for the environment and having the potential to be repaired, reused, or recycled (“What is Zero Waste? 2004). The zero-waste strategy is to turn the outputs from every resource-use into the input for another use, or in other words outputs become inputs. An example of this might be the cycle of a glass milk bottle. The primary input (or resource) is silica-sand, which is formed into glass and formed into a bottle. The bottle is filled with milk and distributed to the consumer. At this point normal waste methods would see the bottle disposed in a landfill or similar, but with a zerowaste method the bottle can be saddled with a deposit, at the time of sale, which is redeemed to the bearer upon return. The bottle is then washed, refilled, and re-sold. The only material waste is the wash-water, and energy loss has been minimized. Zero Waste is a goal, a process, a way of thinking that profoundly changes our approach to resources and production. Not only is Zero Waste about recycling and diversion from landfills, it also restructures production and distribution systems to prevent waste from being manufactured in the first place. In addition, the materials that are still required in these re-designed, resource-efficient systems will be recycled back into production (Roper 2006: p. 326).
____________
References

· Ackerman F 1997. Why Do We Recycle?: Markets, Values, and Public Policy. Washington: Island Press.
· Alan B 2007. The Self-Sufficiency Handbook: A Complete Guide to Greener Living. New York: Skyhorse Publishing Inc.
· Castell A, Clift R, Francae C 2004. Extended Producer Responsibility Policy in the European Union: A Horse or a Camel? Journal of Industrial Ecology, 8: 4 – 7.
· Hanisch C 2000. Is Extended Producer Responsibility Effective? Environ Sci. Technol, 34: 170 -175.
· Organisation for Economic Co-operation and Development 2001. Extended Producer Responsibility: A Guidance Manual for Governments. Paris, France. From Organisation for Economic Cooperation and Development fact sheet about EPR:<http://www.oecd.org/document&gt;
· Roper W 2006. Strategies for building material reuses and recycle. International Journal of Environmental Technology and Management, 6: 313 – 345.
· The Economist, Weekly, June 7, 2007 “The truth about recycling” <http://www.economist.com&gt;
· The League of Women Voters 1993. The Garbage Primer. New York: Lyons & Burford, pp. 35-72.
· Tierney J 1996. Recycling Is Garbage. New York Times, Daily, June 30, 1996, P. 3.
· Tong X., Lifset R, Lindhqvist T 2004. Extended Producer Responsibility in China: Where is Best Practice? Journal of Industrial Ecology, 8: 6-9.
· Wikipedia 2008. Recycling. Website 2008 <http:// http://www.wikipedia.org>;
· Winter J 2007. A world without waste-The ‘zero waste’ movement imagines a future where everything is a renewable resource. The Boston Globe, pp. 1-3. From LexisNexis database: Website 2008 <https:// http://www.lexisnexis.com>;
· Zero Waste California Fact Sheet 2004. What is Zero Waste California?  From Website 2008 <http:// http://www.zerowaste.ca. gov/WhatIs.htm>

The Art of Waste Management (1)

Pigou, the economist who wanted to tax the smog

Cecil Arthur Pigou (1877-1959)

Founder of the Polluter Pays Principle, the English economist Arthur Cecil Pigou comes out of the shadows.

British Petroleum has assumed responsibility for the oil disaster occurred April 21 in the Gulf of Mexico. The explosion of the floating platform releases tons of oil and threatens the entire U.S. Gulf Coast. BP noted that the Polluter Pays Principle (PPP) does not suffer further discussion. This principle is based on measures adopted since forty years to prevent the damage inflicted on nature by the producers, repair them in case of accident or punish them for violations.

This principle of polluter pays appeared as such in the work of an English liberal economist Arthur Cecil Pigou (1877-1959). As a supporter of regulation by the markets, the founder of the Economic School of Cambridge noted that, left to themselves, these markets suffer from imperfections. For example, they do not take into account the “external” costs of products, such as pollution. In The Economics of Welfare (1920), he developed the idea that an economic agent whose activities generate negative externalities makes the community to support a cost higher than it supports as a private agent. Rather than banning the activity, it was necessary to discourage putting a price on its negative effects. This was to be paid in the form of taxes that would eliminate the gap between the private cost and social cost of this activity. Pigou proposed e.g. to introduce such a tax on emissions from London smokestacks to fight against smog.

This same reasoning led him to advocate a compulsory health insurance: what one pays to stay healthy, for example, by vaccinating, has positive externalities on the environment which yet does not participate in the expenses. This positive externality therefore deserved to be distributed equitably.

By the time they were issued, these ideas have not been successful. A proposed tax could frighten the economic establishment, yet close to Pigou for his views on the flexibility of labor markets and hostility to regulation of wages. Regarding left-winger economists and thinkers, they excluded that pollution — considered a crime — could be any bargain, as if a polluter stopped being left when becoming a payer. Having also objected to John Maynard Keynes, whom he was professor, Pigou found himself in the shadow of the glory ousted by his prestigious student and friend.

The increase of environmental risks and environmental accidents in the second half of the twentieth century, however, brought his reflections on the front of the stage. Faced with threats to ban their dangerous activities, or a highly restrictive state control, farmers have gradually agreed to take responsibility in this area and consider the management of adverse consequences of their productions. In 1972, the OECD erected the polluter-pays basis for the protection of the environment. In 2003, the European Parliament did the same, following what several countries did before — Denmark and Switzerland.

Meanwhile, a derived concept, the Extended Producer Responsibility (EPR), stated that

“producers of products should bear a significant degree of responsibility (physical and/or financial) not only for the environmental impacts of their products downstream from the treatment and disposal of their product, but also for their upstream activities inherent in the selection of materials and in the design of products”.

These words, which seem commonplace today, took almost sixty years to be heard.

The CO2 tax introduced in countries as Sweden and Switzerland in 2008 and 2009 is the quintessential example of a “Pigouvian” tax. It is not about an income tax because the entire collection is redistributed to citizens (through medical insurance) but it is save incentive as it rises fuel prices. Without ideological opponent confessed, the carbon tax has many practical issues however: as it makes consumer to bear the responsibility for pollution, it faces strong political obstacles. Many countries prefer CO2 emission quotas instead, allowing trading on an international market for quotas established by the Kyoto Protocol in 1997 — signed and ratified by 187 states to date.

If the concept of responsibility was installed in people’s minds, and if the economic explanatory of externalities proposed by Pigou found an echo within the political left, there is yet no international system that institutionalizes the application form as to guarantee the neutrality and impartiality. The concept occupies many researchers — as many skeptics who are ready to set off the alarms at the slightest attempt.

A Pigou Club, founded in 2006 by the American Republican economist Gregory Mankiw, ensure the sustainability of pigouvisme in its various interpretations. It includes among its sixty members well-known economists like Paul Krugman, Nouriel Roubini, Ralph Nader or Jeffrey Sachs, politicians like Michael Bloomberg and Al Gore and even the actor William Baldwin. Them all support the principle of a gas tax or CO2, and any form of eco-tax to internalize the same social and environmental costs of energy. Some of them, not all, call for offsetting tax cuts on income or sales.

From where he is, Arthur Cecil Pigou watches his new friends with an ironic satisfaction. We guess, behind his mustache, the pleasure of victory.

__________

References:

· Cecil Arthur Pigou, The Economics of Welfare, Library of Congress (U.S.), 2009
· Organisation for Economic Co-operation and Development 2001. Extended Producer Responsibility: A Guidance Manual for Governments. Paris, France. From Organisation for Economic Cooperation and Development fact sheet about EPR:<http://www.oecd.org/document&gt; (Retrieved February 2010).

Obama saves more for better care

Obama’s reform: An expense or an investment?
For conservatives (Republicans but also some thirty Democrat representatives) this is an expense, a redistribution gadget: those who are able to earn money are bled for the benefit of those who are not able to bring in. For liberals we are facing an investment: spending for the poor health, any American – even rich ones – will gain. Besides, this reform is similar to the French universal health coverage-CMU (which impressed Hillary Clinton): taking care of the poor, first you avoid the risk of contamination from the poor to the rich, and then you consolidate an employable and compliant workforce. In the US, the health reform will cost 940 billion dollars over ten years and some 32 million Americans would benefit of it. The aim is to cover active and young, 95% of the population under 65 years. So it costs money.

And it saves money… the hardest to understand. Explanation in 5 points.

The reform creates a more competitive market for insurance and it will be overall cheaper for Americans. So far the insurers provide the richest people who have no health problems. But they do not cover sick. Reform is more than a humanitarian measure; it puts pressure on the cost of health insurance as insured contributors will make the practice to compare proposals.

President Obama’s reform establishes a commission to control health spending, composed of independent experts approved by the Senate. They observe spending excesses in that event.

The most unpopular, but the clearest, the tax on Cadillac insurance (1). Today, employers pay 70% of their better paid employees’ insurance plans and do not pay taxes on it: 250 billion dollars annually for top executives and other senior officers who waste health outrageously. There will be taxed up a certain ceiling: a right way to limit rising of unnecessary health spending.

Turn doctors into caregivers, instead of health merchants. Today, Americans buy health like cars, except they do not want a third car they won’t buy. In health matters, the more doctors push Americans to consume, the more they consume. Obama strikes first at hospitals that offer Therapy Packs with the result one easily anticipates at the end. For the most part, the reform consists in discard the most expensive system in the world, the same who cares the least.

Summarizing the preceding: reforming the philosophy of health, and there, even Republicans agree. Today US system limits health care expenses taking no care of people. Now, the less we care of people, the more health expenses explode. With president Obama’s system, elected people’s representatives will be compelled to focus on health spending, even though they let them go off course drift in the past. Final outcome is $ 138 billion saving cost of Federal deficit in the next ten years and 1,200 billion over the next decade. Obama reform is both an investment and a sharp cutback scheme.

___________

(1) Sometimes referred to as a “Cadillac” or “gold-plated” insurance plan, a high-cost policy is usually defined by the total cost of premiums, rather than what the insurance plan covers or how much the patient has to pay for a doctor or hospital visit.
People who have Cadillac plans often have low deductibles and excellent benefits that cover even the most expensive treatments, but this is not always the case. Premium costs can be high for reasons other than generous benefits, including the age, gender and health status of the customer. In an employer-based plan, premiums are based on the pooled risk of employees and may be higher if many of the employees are sick, older, female or live in a region with expensive health costs. Additional information in ebri.org.

The myth of GDP (2)

II. Measuring progress

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Behind every accounting system of indicators there are not only social conventions but mostly social choices.

GDP cartogram © Worldmapper ·  Click on image for a larger version

How to measure progress?
The introduction of the concept of GDP was first developed in the nineteenth century when Adam Smith highlighted the need to assess the exchange.
For over 200 years the concept of progress has been identified with economic growth – to the point of being confused with it. That is inaccurate since one can not assimilate under the same umbrella such disparate concepts as progress of customs background, human capacity to improve control of its own destiny, progress of science and technology or the spread of knowledge.
The term progress in the nineteenth century identified the role of transforming human nature radically to almost deny it (Hegel): while I transform the world I transform myself. The idealistic Hegel’s vision contrasts with other economists such as Jean-Baptiste Say who identified consumption and progress. Through consumption man sharpens his faculties and moves away from the raw state.
There is therefore a theoretical and bibliographic production, which still weighs on our shoulders, and according to which production and consumption are quintessential civilizing acts. Say it’s true. Yet they are not the only.

Who the progress is intended for?
Since the dawn of capitalism, back in the early nineteenth century, every generation has embraced the concept of progress without caring much what future generations would dare.
A more current assessment should now be opposed: Our collective wealth is the durable sum of individual utilities. What matters is the permanence of our societies over time, their sustainability, their sustainable development: each generation owes a heritage of culture, social relations, a natural heritage. Hence, the need to encourage the development of this heritage and carry out the inventory in order to transmit to the next generation a heritage as much extensive.
But what inventory? And starting from what unit of measure?

Progress and quality of life
The report from the Stiglitz-Sen-Fitoussi commission (International Commission on the Measurement of Economic Performance and Social Progress) proposed the concept of income or net income (and even global income) that integrates i.e. household tasks and leisure time activities. The problem is to monetize them, because how to quantify the quality of life? Or if you prefer, how measuring happiness?
Given these constraints it becomes increasingly necessary to target more objective indicators that tend toward a goal of social development – the goal of social health from Jany-Catrice and Miringoff – as decent housing, durable health, which would cover the progress of this wealth

Two explanations to consider: Primo, there is no economic basis that does not come preceded by ecological and anthropological foundations, or both at once. Any situation that endangers this heritage is handicapping the potential for future economic progress. Thus, the main information we can expect from an indicator is that it alerts us of any significant fraud on the asset. Secundo: quantification is a tool for the qualification and not vice versa. What characterizes a democratic society is its ability to discuss their possible options and values – which is true for a political community endowed with a motto like “liberty – equality – fraternity”, as for other subsystems. By subordinating quantification to qualification we are pointing towards a double right: scoring in another way or otherwise not scoring at all — as well as the odds of discussing the qualifications without regard to the reductionist optics of quantification.

Even though being limited, GDP is an indicator that has allowed access to a multilateral dialogue which is embodied into international relations: in this sense, the rationale of the GDP is to recognize the specific weight of countries like India, Brazil, China or Russia which will be more fairly represented in the IMF, the World Bank or WTO. This indicator allows therefore enriching the politically very intricate geostrategic debate.

Thus, the Stiglitz-Sen-Fitoussi commission anticipates power ratios to evolve within a comparative logic. That was the genesis of GDP in the postwar period. And the big issues that postwar societies face are indeed industrial reconstruction – but they neglect other more fundamental questions, namely: how could it be that the worst atrocities has been able to birth within a cultured and educated civilization?

The myth of GDP (1)

I. GDP questioned

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How to go beyond the gross domestic product?
Pursue a modern reflection of wealth means finding tools to move away from an excessively quantitative, restrictive and accounting outlook to assess the collective performance. Changing indicators of wealth while we amend our way of production and thinking involves rethinking the limits of national accounts.

The Satisfaction with Life Index. Blue through red represent most to least happy respectively; grey areas have no reliable data available.

Thirty years to date, GDP per capita has tripled in our developed societies. Why, then, according to all surveys, the welfare of the average Joe has not known same dynamic? How can we move beyond GDP? How to measure progress and the wealth of a nation?

New indicators of wealth: a dispute that goes way back.
The first time the indicator of gross wealth was challenged academically came about the 1970s when the Club of Rome casted doubt on the goodness of the concept of growth. Also in 1972-1973 the first Tobin-Nordhaus report — Measure of Economic Welfare — tried to correct the GDP by eliminating what they called defensive expenditures, ie those costs that do not meet net investment: for example costs repair, recycling costs, etc.

It goes without saying that such initiatives aroused the indignation of the national accounts of the moment — criticism that reappeared in the 1990s, since GDP is a taboo indicator, a fetish indicator of human behavior, a structuring myth as a result of the War World; a myth displayed as the guidebook of postwar reconstruction from a Keynesian perspective of budgetary programming. Somehow it took so long to implement that one understands well the current reluctance not to put into question: GDP is the monetary indicator of excellence, the result of the added values, a convenient indicator that lets you add units from various sources. It is universal and widespread as it shows the supremacy of production and consumption into our advanced societies.

GDP, a growth model of industrial production after WW-II, becoming now obsolete.
Currently, the prevalence of environmental concerns and the primacy of issues related to the culture of services and the economy of knowledge are critical – mostly when foreseeing a change in the assessment criteria of the global accounting aggregate.

The GDP has significant limitations. Primo: It only takes certain activities into consideration and always around paid work. It neglects significant activities: care of children, housework, voluntary work, political activity: non-monetary activities that allow our civilization to last over time and which count for nothing in the overall aggregate assessment.
Second key limitation: the GDP is little or no sensitive to inequalities in consumption and production sharing.
Third limitation: it is a cash flow indicator, a flow and stock accounting that does not outcome into a balance: you can not produce added value and simultaneously destroy part of natural capital — human and social. Its principle of action is to “create assets primarily, and then redistribution will follow.”

That is why it is essential to review the wealth concept while we change our way of thinking. Another accounting logic is possible.

Changing or completely replacing GDP?
There are other indicators in our day. Starting on the human development index till the ecological footprint — not to mention Osberg and Sharpe’s index of economic welfare, Ruut Veenhoven’s ranking of quality of life and happiness or the Catrice Jany’s social health index.

Other indicators are concomitant, such as the administration of physical resources, the aggregate indicator of the ecological footprint and the adjusted net savings – though the latter, simply monetary, suggests a poor vision of sustainability: roughly speaking, a country can pursue a sustainable development path even when its natural capital is deeply exhausted.

America does not understand the crisis

Fall of Quotations ©Miscellaneous

Being concerned about the new American plan for banking supervision, many have welcomed with great emphasis the real revolution in the regulation proposed by Timothy Geithner, the US Treasury Secretary.
If you look a little closer, the collective enthusiasm is shocking. Certainly, the powers of the Federal Reserve have been increased –even if subject to congressional approval, which is not completely negligible. Certainly the FED will turn into an agency aimed at consumers protection – and it is not too early indeed. But on the merits, one has the feeling that the U.S. administration has made its own the Lampedusa’s motto in The Leopard, « Everything must change so that everything remains the same », since in a country where the derivatives are still supervised by the Ministry of Agriculture, the general household yet called for by Barack Obama during his campaign will wait a few months or a few decades. The idea of a single supervisor has been permanently abandoned; the adoption of the rule where one sole supervision should apply to all financial institutions taking the same kind of risks, has been shelved. One may ask if this reform is yet another demonstration, since the start of the crisis, of the Anglo-Saxons willingness — United States but also England — to evade any new rules that would jeopardize their financial imperium? Examples do flourish which allows me to reinforce that point of view. The United States are self protected – because this is protectionism – against the thread of accounting and prudential rules that Europe keeps on applying with a rigor bordering on mysticism. Similarly, nothing has been done on the rating agencies. It is significant that CRAs are two-thirds American for the whole world market. In the same way, control of insurance companies, nothing has been done while the virtual collapse of AIG could be considered a pure product of U.S. regulatory deficiencies. What is valid for the United States is also applicable for the United Kingdom. The FSC — which is the equivalent of the Financial Market Authority in Britain — has not yet made any proposal on the way of a steady reform. Also, UK remains a vast tax haven. During that time, the European Commission and the governments of continental Europe have stated unrelenting rules even more stringent and in many cases still too inadequate to manage this crisis of unprecedented proportions. I think we should really ask the question: on one side, aren’t we witnessing an Anglo-Saxon world which has decided not to reform, and on the other, a European world — Continental Europe – which, seized by debauch to try reforming, monitoring and supervising, risks masses weakening the financial industry in this part of the world?

Africa Underrepresented

Beyond Africa, Developing World should have more say in key forums. African officials dismayed not to have a bigger voice in key global economic forums.

When world leaders meet to tackle the global financial crisis, Africa is represented only by South Africa. African officials argue that the continent need better representation, given the effects that the turmoil is having in Africa as well as the continent’s growing financial importance. The complaint could apply equally to other developing countries.

The global crisis has come just as many African economies were turning a corner, carrying on  improvements in governance, technological change, debt relief, higher prices for their exports as well as inflows of funds from Asia and from Western investors seeking higher yields. Many African countries have spent decades gearing economic policies to attract more private capital and chase away a reputation as unreliable investment destinations.

But turmoil on world markets has cut the supply of money as the world’s biggest banks shift funds from new projects to shoring up balance sheets, leaving African governments wondering how their infrastructure will get built.

But should Africa be better represented?
Compared to its own recent history, African economies have been doing extremely well, but they are still small in global terms. As Africa’s biggest economy, South Africa will be attending, together with representatives of the main developed and developing countries. Is that enough? What advantage might Africa gain from having a bigger voice at the key summits? What about the world’s other poorer regions? Should they have more say too?

Current Crisis,  Cure or Croak

The real economic situation is constantly in a state of fluctuation and the ready made solutions in the classical or neoclassical patterns avoid an enduring and secure solution to the current crisis. Over the years the very concept of ‘economy’ has undergone a sea change. The models that concentrate on national economies of olden years have become redundant and they don’t go beyond a transitory solution suppressing the real economic forces, side tracking the long term perspectives. The durable solution needs a fresh debate among the political economists to come out with an integrated co-operative model, keeping in mind the linkages of the so called developed and the developing economies, in which the monetary and the fiscal policies play a incidental role.

Simon Kuznets was a far sighted development economist who could foresee more than half a century ago that “poverty anywhere is a threat to development everywhere”. The ‘national economy’ is a misconception today and an attempt to resolve the existing depression at the national levels will always contradict the expectations, specially of the developed countries, and they are likely to slip from devil to the deep sea.

I look at the present crisis as a consequence of too much monetarism of the developed countries for maintaining their growth rates overlooking the potential development of South Asia, Africa, Latin America and the Middle East. This might lead to persistent speculative tendencies, playing down the primary role of money and ultimate crash down of core economies of the world creating a worldwide economic chaos.

The retrieval from it might take a century.

Obama Lays Siege to the Financial Casino

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The tragedy that hit Haiti last week meant a welcome sigh of relief to the four Wall Street emperors. That sad day — Wednesday 13 to be exact – wherein more than 111,000 people were killed in one of the poorest countries in the world, Lloyd Blankfein, Goldman Sachs CEO; James Dimon, JP Morgan Chase CEO; John J . Mack, Morgan Stanley CEO and Brian T. Moynihan, Bank of America CEO, responded to questioning by the Financial Crisis Inquiry Commission (FCIC), a commission created by President Obama last year to investigate and discover the perpetrators of the worst financial crisis of the past 70 years.

The catastrophe in Haiti prevented these four glorious characters to get the front pages and the information came buried in the back pages the next day. Parts of the final reports are here. They worth a look for a clearer understanding of recent events and from which the press has turned a blind eye, such as articles published today by El Pais, one of Sandro Pozzi and another by Peter Larsen. None’s aware of the reasons for President Obama to besiege bankers — “If they want war, we will give them,” he said Friday — as well as the requirement to divide the largest banks into smaller entities, or the application of $ 120,000 million tax expected to recover some of the rescue plans. This is a direct comeback to the results of last week and which the press did not report.

Wall Street bankers admit mistakes by the financial crisis. In their view, they already assumed an attitude of apology – but they did not actually account for their acts. As when Lloyd Blankfein said: “What we did, didn’t worked well. We regret that people have lost so much money. ” But what “not worked well” for the people, worked well for them, they who shared out hundreds of billions of dollars in bonuses.

As of Wednesday and Thursday last week, bankers totally downplayed the consequences of the crisis: “It was the perfect storm of the year”, Blankfein said, while James Dimon trivialized “This happens every five or six years”, as if we were into a normal slowdown business cycle and not into a systemic failure founded on financial basis generated by fraud. And although they were cautious not to blame the government, the government caught them and wouldn’t let go of the piece. Furthermore when the bank has continued speculating and creating the seeds of the next crisis.

The investigation led by Sheila Bair, of the FDIC (Federal Deposit Insurance Corporation) helped to illustrate that the trouble is structural and that government and consumers have long been hostage of Wall Street. The frantic struggle to eliminate the Glass-Steagall Act was one of their results. Now you understand Obama’s saying “We will never again be held hostage to banks too big to fail”. And this is just the beginning.

The investigation detected that commercial and investment banks, in collusion with political world, managed to completely disable the security mechanisms and take full control of the system while cheating the government. No public institution was relevant to their view, all public boards were pawn agencies like the SEC — that despite having warned of repeated fraud cases as Bernie Madoff, failed authorizations to investigate and arrest, and so the unscrupulous swindlers could commit crimes with the gentle complicity of the banks. Financial capital formed its own internal guerrilla and finished devouring the industrial capital, the one producing and creating jobs.

Much of this is because the leading figures of finance (Henry Paulson, Timothy Geithner, Lawrence Summers and Robert Rubin) have held positions in banking, government and Wall Street: what must be considered a real incest. You can not serve two masters, being Secretary of the Treasury (that is, a high state official servant) and hold such visible ties with commercial banks, more so when the Fed, is since 1914 a fully private body which lends money to the state, and whose interests are paid by all taxpayers. It would not be surprising that once the whole truth is done Fed decides to return to the Treasury. Maybe Paul Volcker’s plan has already thought about it.

The Impact of Economic Crisis on Poverty in Latin America

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The report “Social Panorama of Latin America 2009″, presented by the Economic Commission for Latin America (ECLAC), projected that about 9 million people fall into poverty, the 2009 product of the economic crisis, which means an increase of 1.1% over the 2008. This figure marks a reversal in the trend shown in the period 2002 to 2008, representing 25% of the total population that had escaped poverty.

The current global crisis will cause nine million people in the region to fall in poverty this year, according to the ECLAC report Social Panorama of Latin America 2009, released November 19.

Source: Economic Commission for Latin America and the Caribbean (ECLAC), based on special tabulations of national household surveys.

a/ Estimates for 18 countries in the region plus Haiti. The numbers on the top part of the bars represent the percentage and total number of people living in poverty (poor and indigent).

In the study, the Economic Commission for Latin America and the Caribbean estimates that poverty in the region will increase by 1.1% and indigence by 0.8% with regard to 2008. Thus, people living in poverty will reach 189 million by the end of 2009 (34.1% of the population), compared to 180 million in 2008. Also, indigence will reach 76 million (13.7% of the population), up from the 71 million last year.

These numbers depart from the trend towards poverty reduction until now prevalent in the region. The nine million poor and indigent represent almost a fourth of the population that had already overcome poverty between 2002 and 2008 (41 million people), due to greater economic growth, the expansion of social spending, the demographic bonus and better income distribution.

The study was presented today by ECLAC Executive Secretary Alicia Bárcena, who stressed the urgency that the region develop a new long-term social protection system.

“We can’t say that all that was attained between 2002 and 2008 has been lost. It is not a lost period. However, the rise in poverty calls us to action: we need to rethink social protection programmes with a long-term, strategic perspective and measures that make the most of human capital and protect the income of vulnerable families and groups,” she said.

The projected increase in poverty for 2009 will delay the compliance of the first Millennium Development Goal of eradicating extreme poverty and hunger by 2015: the 85% of progress on this goal in the region in 2008 will drop to 78% by the end of 2009.

Some countries may experiment a greater increase in poverty than the regional average, such as Mexico, due to lower GDP and deteriorating employment and salaries.

The current crisis will nevertheless have less impact on regional poverty than prior crises, such as the “Mexican crisis” in 1995, the “Asian crisis” in 1998-2000 and the Argentinean and “dot.com crisis” in 2001 and 2002. For now, the region has been able to maintain the purchasing power of salaries and low inflation.

Income distribution in the region improved significantly from 2002 to 2008. During that period, inequality improved in seven of the 18 countries included in the study and worsened in only three.

Governments in the region have made great efforts to increase social spending. Between 1990 and 2007, public social expenditures per capita rose from 43% to 60% of average total public expenditures in Latin America.

“This shows that it is possible to grow and redistribute, expand social spending and be fiscally prudent to significantly improve living conditions of the population. Latin America is not condemned to be poor or unjust,” stated Bárcena.

For the future, ECLAC suggests reforming social protection systems and adopting both urgent short-term measures as well as strategic long-term ones. In doing so, governments should avoid fiscal irresponsibility and rigid labour markets, increase taxes progressively, redistribute social spending and extend coverage of social services.

Likewise, ECLAC recommends strengthening government assistance transfer programmes, among them conditional transfer programmes (CTPs). There are CTPs in place in 17 countries in the region, encompassing over 100 million people; that is equivalent to more than half the population living in poverty in Latin America.

ECLAC proposes a set of measures as a guide for countries to offset these results:

The Financial Bubble is Ready

Stanley Kubrick’s Dr. Strangelove [ The music is We'll Meet Again by Vera Lynn]

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Dubai’s House of Cards
Dubai is the leading exponent of housing bubbles that have occurred worldwide.  Eccentricity of management has turned a city in the middle of the desert in a field full of hotels and skyscrapers. It was a time – the golden era – when anything was little for the Emirate.

But the crisis has beaten hard Dubai. Works have stopped and credit flow is dead blocked. Up to the point that, yesterday the state holding announced a moratorium on payment of $ 4 billion debt – the same holding that built the famous Jumeira Palm Island. This did not sit well with international markets.

The problem is that the Emirate owes $ 80 billion and markets begin to have doubts about its solvency. As soon as the moratorium on debt payment was announced markets felt down. The worst financial crisis could recur. But instead of banks’ cessation of payments we may now witness States’ suspension of payments.

Speculative Bubble Emerging
Meanwhile, in another part of the planet – the United States – the policy of the Federal Reserve to keep interest rates near zero is fuelling a wave of speculative capital that can initiate the next crisis. Many warn that a new bubble is brewing, and several specialists see in this quantitative easing an equivalent outcome Japan had for its crisis of the early 90s. Low Japanese interest rates did contribute definitely to the outbreak of the Asian crisis in 1997.

Ben Bernanke, an academic on the Great Depression, monitored the most massive injection of liquidity into the world’s largest economy, committing himself not to make the mistake of the 30s when the Fed officials pursued a strict and rigorous monetary policy that only aggravate the crisis further enough. The lack of available money in 1930 is regularly considered the reason why the crisis lengthened for a decade. The little response to current liquidity injections shows that the situation is all but comforting and that new limits of monetary policy may further alter the global imbalances that the crisis left uncovered.

One of these speculation operations is the so-called carry trade; investors borrow in $ (0%) headed for invest in other currencies that offer higher interest rates such as Australia, Brazil and New Zealand. Much of the flow in the capital markets moves ahead that direction. Hence the importance that Asian and Oceania assets are acquiring versus Europe and US assets. Korea, Taiwan, Hong Kong and Singapore assets are rising to levels that are incompatible with the reality that replicates the real estate bubble of US in the 90s and Japan in the 80s – when the Imperial Palace Gardens in Tokyo came to cost more than the entire US state of Washington.

Despite this, former Fed Governor Frederick Mishkin assumed that there is no evidence that a speculative bubble is emerging, since not all bubbles present risks to the economy. Mishkin split good from bad bubbles. The former are instigate by a credit boom, whereas expectations lead to increased demand, generating a rise in asset prices, encouraging lending against those assets and positive feedbacks cycle until it explodes.

The second category of bubbles what Mishkin calls “pure irrational exuberance bubble” is less harmful because there is no credit boom, and if no credit boom occurs the bursting of the bubble can not damage the system – e.g. the bubble in technology in the ’90s and the dotcom’s of 2000, had no global impact. For Myshkin the rise of the credit stirs the bubbles. Now, there is no credit boom in small scale. But bubble is building on the macro scale of speculative capitals, those who move billions of dollars of pension funds, the very same that play in the stock market or speculate on the gold and oil at the expense of the dollar. And at macro levels, everything where bubbles get involved presage awful signs for the economy. Otherwise, it’s like thinking that a bomb may have some positive effect.

Future generations’ fate is at stake in Copenhagen

Negotiators will try to reach a political compromise on fighting climate change in Copenhagen

Negotiators will try to reach a political compromise on fighting climate change in Copenhagen. Countries including the United States are backing away from commitments made two years ago to fight climate change.

Only globally coordinated international law that is binding and can be enforced through sanctions when violated is capable of possibly preventing Greenland’s ice sheet from significantly melting, semi-arid regions from drying to the point where millions of people are forced to flee and extreme weather conditions from a state of irreversible damage even wealthy countries’ economic powers.

If we continue to build coal-fired power plants and increase our use of gasoline and diesel vehicles, then we will literally be burning up many people’s futures. Approximately half of the carbon dioxide generated by that exhaust will remain in the atmosphere for centuries to come, and will continue to accumulate – unless we reduce output by at least 50 percent – and will raise temperatures in the lower atmosphere, the surface of the Earth and gradually the inner-regions of the ocean to levels which homo-sapiens have never experienced.

Only after a delay of decades will the full level of warming be reached, which will only be complete after centuries. Sea levels will continue to rise for centuries even without further warming of surface temperatures.

Humanity has never had to solve a long-term problem such as this, which is why our present political infrastructure is of little use for this phenomenal task. We need global domestic policies such as those of the European Union that already exist for a small portion of the international community.

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Carry out the polluter-pays principle

Burning coal is like burning people's futures

As yet, every country deals with the external effects of supplying energy in its own ways. Nearly all countries go so far as to promote global warming by reducing the prices of all or some fossil fuels for all or some portions of their populations, and they saddle succeeding generations or the general public – but not the emitters – with external effects such as health costs, air pollution or climate damage. Each year, direct or indirect subsidies account by approximation for 300 billion Euros ($450 billion) worldwide. Nearly all humans pay nothing for the emission of hazardous substances such as illness-causing diesel soot, and fainthearted European emissions trading of carbon dioxide is still far removed from an actual internalization of such external effects.

In Germany a kilowatt hour of electricity generated by a black coal-fired plant should cost 7 euro cents more with adherence to all environmental costs and 8.9 euro cents in the case of brown coal, which means that wind power, with an electricity-compensation price of 8.5 euro cents today, would already be cheaper than energy generated by brown coal. All the same, the large electricity distributors continue to speak of subsidizing renewable energy sources and most citizens parrot what they say.

Energy providers in Europe would only be acceptable choices as suppliers if their portfolios included a portion of renewable energy sources larger than the overall average. At much less than 2 percent, they lie miles beneath today’s average of 11 percent of energy coming from renewable sources.

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What would a Copenhagen Protocol a success?

First of all, when it includes binding and stronger emissions reductions for all industrialized countries by 2020 of at least 25 percent measured against the output of emissions in 1990.

Second, if the integration of countries with emerging markets – which encompass about half of all humans and in several of which the per-capita emission level is rapidly approaching our own – were to succeed along with initial reduction measures through partial financial compensation of their reduction and adaptation measures through global emissions trading amongst industrialized countries.

Third, if industrialized countries give financial support for measures to adapt to the changing climate to particularly affected developing nations.

All of the above was already covered in the declaration of the 13th United Nations Climate Change Conference on Bali.

Industrialized nations should help emerging countries adapt to climate change

But now several countries are hesitating, including the United States. Its new president is being limited by the long-term effects of erroneous politics led by a public and its representatives who are so unwilling to see the facts that the average US citizen will remain the front-runner when it comes to emissions for a long time to come.

Fourth, I would like to see a commitment to a long-term objective of emission equality, recognition of the equal rights of every human to produce emissions, and therefore much stronger emissions reductions for strong emitters such as the United States and the United Arab Emirates as a precondition for global emissions trade – adherence to the polluter-pays principle. Emissions would cost money and the market would initiate a rapid alteration to the energy supply system. We would only need a five-thousandth of the potential energy of the sun, and every country would have the bulk of its energy resources (sun, wind, water) within its borders. The conflicts connected to the appropriation of oil and gas would be things of the past.

But even should this succeed, coming generations will still have to carry the burden because we did not undertake the comparatively marginal effort of emissions reduction as compared to the cost of adaptation. This is in part because we did not initially know about the issue, and then nearly all of us suppressed it, and in part we still do not want to recognize it.

Should nothing be accomplished in Copenhagen, the possibility that in the 22nd century many cities with millions of inhabitants on weakly protected coastlines will further sink rapidly increases. Even before that occurs, millions of people will have been displaced from regions of industrialized nations distressed by water.

Bank Secrecy: the Key to International Transparency

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Bank secrecy and tax havens have now become a key factor for international transparency. Their linking to corruption and money-laundering has been uncovered by the financial crisis. This is one of the reasons why developed countries must tackle corruption internationally, a curse that uses secrecy to screen dirty money transfers. In this interactive map you can have a look on the transparency level in 180 countries surveyed and here is the index.

While New Zealand, Denmark and Singapore top the list of the most transparent countries in the world according to this survey of « perception of corruption », Spain lost four places in the ranking (28^th to 32^nd), France gets back from 23^rd to 24^th position, UK move back one place, same as US – demonstrating that the perception of corruption has risen. In the presentation at its headquarters in Berlin, the organization has emphasized the fight against tax havens noting that « there must be no safe haven for corrupt money ». Like every year, countries at war are perceived as the most corrupt, with Afghanistan and Somalia as the worst two.

In Latin America, Venezuela is one of the world’s most corrupt countries, ranking 162, while Chile and Uruguay are located as the least corrupt sharing 25^th place, followed by Costa Rica (43) and Cuba (61). Brazil shares with Colombia and Peru where 75, Mexico shares the 89 with Rwanda and Argentina is 106. China is located in 79^th.

Since 1955, the organization publishes annually an index of perceptions of corruption ranging from a score of ‘10’ for a country perceived as « transparent » to ‘0’ for one seen as « corrupt. » Transparency International does not spare criticism of industrialized countries in a time when governments attempt to revive the economy by injecting a huge mass of public capital on growth aid programs.

The first defendant is bank secrecy « affecting efforts to fight corruption and recover stolen assets”. In that sense, IT downplays its own index, indicating that the problem of banking secrecy concerns « many countries that lead the classification », such as Switzerland in fifth place and Luxembourg on the 14th. So, the report points that

« The money derived from corruption should not be able to find refuge areas. It’s time to end the excuses.»

As for the great revival plans launched by the industrialized countries, Transparency International warns its perverse effects.

« When you spend a lot of public money very quickly and the authorities that control programs are being overwhelmed, the risk of corruption increases. It is a major risk factor », said the president of Transparency in Germany, Sylvia Schenck.

One thing is clear under current circumstances: the existence of tax havens made easier the crisis to strengthen; hence, the obligation to besiege these sources of corruption.

South is the First Victim of Global Warming

Several surveys confirm that poor countries will be the first victims of climate change, even if, being low emitters of greenhouse gases, they are less responsible.

A report published early September 2009 by Maplecroft –  a British cabinet expertise on global risks – shows that the most vulnerable countries to global warming are Somalia, Haiti, Afghanistan and Sierra Leone. Twenty-two of the 28 countries exposed to “extreme risk” are located in sub-Saharan Africa.

In the meantime, the Asian Development Bank presented in Manila the results of a conclusive report: melting of Himalayan glaciers threatens the food security and water availability of 1.6 billion inhabitants of South Asia. In New York, Rob Vos, director of the UN  Department of Economic and Social Affairs (DESA), ruled that ” If we do not reduce significantly GHG emissions, the damage to the [economies of] poor countries as a percentage of GDP[ gross domestic product] will be up more than ten times greater than in the United States and most other developed countries ” [1] . Mr. Vos commented on the report by his department. According to the conclusions, investments should be done every year in climate change mitigation and adaptation to its effects by 1 % of world’s GDP, i.e. more than 500 billion dollars.

A few months earlier, in May 2009, the United Nations had issued a report about the international strategy on risk reduction -launched in 2000. The document operates the first synthesis of knowledge about natural disasters that have occurred between 1975 and 2008. Even if he admits the document is not exhaustive, the text nevertheless represents a unique body of knowledge.

Between 1975 and 2008, 8.866 disasters have killed 2.284.000. Regarding flooding, the risk of death increased by 13% between 1990 and 2007. The picture is not, if we dare say, equally catastrophic. The absolute number of human or economic losses increases throughout the period, but it remains proportionately stable because of demographic and global GDP growth.

But according to UN experts, the situation would deteriorate because of climate change and ecosystems degradation. The latter is a factor too often ignored. Albeit not apple to apples, ecosystems manage to cushion the impact of natural disasters. Regarding climate change, it will increase the risk of disasters. The vulnerability of populations is one of the other factors that accentuate the risks. Action by Governments (earthquake standards, etc.) becomes crucial: Japan and the Philippines suffer roughly the same number of typhoons, but they cause 17 times more deaths in the Philippines than in Japan.

Have a look on Mr. Rob Vos’ press conference here enclosed:

[1] 2009 World Economic and Social Survey: Promoting Development, Saving the Planet.

A pedagogy on carbon tax

Carbon tax on the way back to Welfare Economics

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>> Click here to translate this page to French

Designing a tax for everything that contaminates incites people to preserve environment, the atmosphere in particular, which is in serious danger. The idea is to penalize polluting energy in transport, housing and personal consumption. Every time we consume less fuel but this is not enough to achieve the goals set at the last conference on climate change: hence the idea to programme a compulsory tax (to be paid per tonne of fossil fuel issued). This in order that the world decrease to half the emissions of greenhouse gas (2050) and limit Earth warming to 2 degrees – which causes climate change.

Global warming due to greenhouse gases from the combustion of carbon dioxide is 49,000 million tons of CO2 emissions. Enough is enough, this must be punishable. Its effects could lead to an overall increase of 3% of the temperature within approximately 100 years. The cost of global warming is estimated at 5,500,000 million (Nicholas Stern) [1]. While the concept of a tax on CO2 emissions comes from Arthur Pigou (Economics of Welfare) [2] who, in 1920, first established the polluter pays principle.

Now …

• Should we tax the product itself or the energy consumed?
• What about taxing imported products?
• How do we avoid the risks of inequality?
• What can we do with the tax revenue?

The solutions adopted by each country are different.
France, with about 50,000 million of environmental taxation laid up, shows a certain delay. The structure of French environmental taxation is so unwise by voluntarism emphasis that it will not generate benefits in the sense of net contribution or revenue – but only more taxes on water, on garbage, on the consumption of hydrocarbons (TIPP) which are not reversed in any improvements (infrastructure, citizen responsibilization); on the contrary, it is the umpteenth patch covering the phenomenal public deficit hole. The pedagogy turns into a demagogic fatalistic verbiage as to mislead the common man – because it ignores the virtues of consensus that in all the surrounding countries is originated in the parliamentary debate, which is where popular sovereignty revives up and where such taxation should be decided, not in the halls of the presidential palace – a very usual symptom in the French Republic whose skin politicians refuse to change. These rates represent 3% of GDP … thrown away. Unless considering France as the cleanest country in Europe thanks to its huge nuclear program, which on the contrary converts this country in less safe by the obvious potential for nuclear incidents due to its atomic central park and may involve in quantity of radioactive wastes concerned – the highest per capita in the world. The rhetoric continues, forward flight, too. The only positive point is that hydroelectricity accounts for 93% of energy resources … with the aggravated disadvantage that the driving force’s the nuclear cell. Who do we kidding? If the decrease in CO2 emissions must involve the breakneck growth of the nuclear beast, then where do we go? Stripped from one mouth to feed another.

Moreover, the tax on CO2 emissions in a country is not really quantifiable to impact CO2 emissions at the global level. Global policies are needed to internalize environmental costs and act on the behaviour of firms and households. That is the healthier principle. France is wrong in the way of carrying it out: confusion over the extent rate itself (cheerfully going from 20 to 32 for up to 100 euros / TN emitted by 2030, then left who can say where?) over the exemptions, over its operation. The increased cost of living is set: estimated at 10% the additional costs of household heating in French homes by 2010, from 5 to 10 cts. for a liter of fuel at the pump now. Another consequence is that the tax, as is, will ruin the remaining local industry (current bleeding is the largest ever seen in France) and as usual,  only a few (large) groups will afford to face such additional costs in the midst of an industrial desert. Who will invest in a country that overtaxes 100 euros each emitted CO2 TN? As for the wicked 35h law, nor study or reflection has been implemented and no effort tryed to coordinate with other European countries. The devil is in the details, French say …

The topic of compensation is often talked about, but what about inequality between consumers? What to do with the € 8,000 million that the government is supposed to enter through the concept (e.g. fatten the coffers of the ministry of finance)?

Swedish pedagogy against French demagogy
Other countries as Sweden have also established a carbon tax, even more substantial, but with a very different modus operandi: e.g. Swedish tax implies a graduated scale for companies that invest more in technological innovation to improve production processes in CO2 emission – now that is pedagogy. It’s bad times in terms of economic crisis situation but action is credible in Sweden and demagogic in France where nobody knows whether the tax will be redistributed or yet another ‘neutral’ tax – that is, outside of Pigouvian incitement, which has the favour of Prime Minister Fillon.
Because the environment policy can not be summarized to raise the level of taxation or implementing new taxes, unless you’re old tricks again and increase unemployment and public debt. Two years back here it was the bonus / malus tax on car CO2 emissions (an onerous  marketing device that ruined much of the automotive industry, with a fall of 40% of French production, forcing car manufacturers to abandon the profitable manufacture of sedans to engage in small cars’ on which the profit margin is zero or nearly zero), last year was the tax on diapers for newborns turn, this year it is the time of a tax on CO2 emissions … a joke (or better yet, a shortsighted policy).
The temptation to tax the super profits of the oil industry (Ségolène Royal) would only have negative repercussions in the pocket of the consumers. Better a tax that changes that behaviour and not simply going to fatten the coffers of the state and its lifestyle. Report and well communicate with citizen, having a little patience not changing everything at a stroke or by decree.
Taxation reforms are essential throughout our countries. We talk about tax incentive and not subsidies e.g. car industries so that they manufacture a kind of cars that they would have made anyway. Let’s face green taxes; it is just and necessary, but mostly to help us getting out from the unending virtual crisis of rampant capitalism, far from the real economy. No green custom duties at European borders, a trend advocated by some, in their eagerness, to lead us into a new protectionism; but rather concentrating on comprehensive policies, at least in Europe, better globally. It is useless to establish national policies not coordinated with the rest of countries, giving way to protectionist policies more or less latent: have a look on the global trade drop of 12%, if you want to add more crisis to crisis just add the perversion of protectionism to all the difficulties we face today. The environment is a global public good. To be honest we do not know how to deal with externalities steadily i.e. when China or Brazil pollute, they do not so in their respective territories only but in the entire world. Enforcing tariffs however is theoretically a nice building, but in practice it is just about regression. Also do not forget that China’s censure is unfair: the PRC is making genuine efforts to drastically reduce pollution in its industries – and it still does not occur in most of developed countries.

One of the biggest questions is to identify what the US attitude will be. So far the US had no concern on the Kyoto Protocol; the position is changing but it all depends on the type of changes that comes about there. Scenarios abroad are in my opinion: the role of the G20, the Doha WTO round re-launch and the climate meeting in Copenhagen. All three turn around the same concern: the need for global economic governance to meet challenges.

Pedagogy missing in the US and UK.
The increasing size of speculative capital flows, mainly in US and UK, is the pending business. I mean speculative capitals and hot money outflows are bigger now than a year ago – in the worst moment of financial-mortgage crisis. Hot money is tossed into the emerging economies as the first symptom relief crops up. Thus, the central bank of China is increasingly doomed to buy huge reserves to support a sick dollar (thus some $ 70,000 million per month, are beyond the circuit of productive investments in order to prevent the US currency to collapse again), deflecting precisely investment in productive economy. That is, in essence, we have not yet altered the global imbalances, and even we are somewhat higher than before the crisis. The issue of executive bonuses and allowances is less significant than the required dismantling of the opacity in the banking investment -something impossible in the most key European financial center, the City of London, since the future PM Cameron opposes to it. This, in US terms, is yet unimaginable. So far the best indicators of the City and NY – queues at the best restaurants – behave well as table reservations vary from 2 to 3 months … bonuses, windfalls, luxury cars, stratospheric contracts are just around the corner again. To pin a button: flows exchanged in the derivatives markets reached a record of vertigo – almost 10 times world’s GDP. So how can David control Goliath?

To be continued …

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[1]  The Stern Review on the Economics of Climate Change is a report on the impact of climate change and global warming on the world economy. Written by economist Sir Nicholas Stern, commissioned by the UK government, the report was published in October 2006. The report represents a milestone by becoming the first government report commissioned by an economist rather than a climatologist.

[2] Arthur Pigou is considered the founder of welfare economics and the main precursor of the environmental movement to make the distinction between social and private marginal expenses and advocate for state intervention through subsidies and taxes to correct market failures and internalize externalities. Welfare Economics is his most emblematic book.

Financial Crisis is Delaying African Development Goals

Education needs to be made available to more African children

Many development analysts assumed in relation to the last G20 summit in Pittsburgh that it might not forget about Africa in its talks on the financial crisis. Developing nations on the continent are being especially hard hit at a time when things were starting to look up.

Africa’s developing countries are suffering even more from the financial crisis: not only are they having to make do with less development aid funding, but the amount of money that emigrants are able to send back to support their families at home is much smaller.

The economic crisis will make it harder to reach development aid goals

The crisis is threatening the hard-won progress made in Africa’s developing countries at a time when the situation was starting to improve. African national economies were showing an average growth of 5 to 6 percent in recent years. Kenya, for example, has seen the development of a middle class that invests in its own economy. Outside money, including from newly industrialized countries such as China, Brazil and India, had considerably upped the level of foreign investment. The International Monetary Fund (IMF) estimates that foreign investment and credit for Africa increased to $53 billion (40 billion Euros) – five times the amount in 2000. But Donald Kaberuka, president of the African Development Bank, warns that the crisis could unravel this progress.

“We have to distinguish between the financial crisis and the economic crisis,” Kaberuka said. “Until now, (the financial crisis) has not hit a single African bank, but it has affected national economies. For 2009, we’re expecting an average maximum economic growth rate of 4 to 4.5 percent, no more. And it could well turn out to be smaller. We have to mobilize inner-African capital. We have very rich and very poor countries in Africa. On the regional level, the African Development Bank has already managed to mobilize capital, but not for the continent as a whole.”

Fears of a setback

Ad Melkert is a UN under secretary-general and an associate administrator of the UN Development Program (UNDP). He also fears that Africa will suffer a setback.

“This is all happening after a considerable number of African countries have, over the past few years, experienced significant economic growth and an increase in jobs and investment,” Melkert said. “Now, there’s a reversal. That means when the international community – the G20 – meets in April in London for its financial summit, they have to work out an international agenda there. They have to ensure that they factor in Africa, because this is an international financial crisis that is having effects worldwide.”

Growth rate of 3.4 % expected for sub-Saharan Africa

International institutions such as the Organization for Economic Cooperation and Development (OECD) are calling for multilateral risk management for the financial markets. In Davos, some major actors called for the creation of global economic council. The inclusion of developing countries in such bodies will be decisive, says Melkert. The UNDP representative is hoping for a clear statement from the G20, as otherwise, the UN’s development goals will be in danger of failure.

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“The crisis has created a totally new starting position,” he said. “It really does mean a setback, even for really successful countries like China, for example. We’ll have to really go the extra mile now if we’re to reach our development goals.”

Despite the crisis, some industrialized countries as Spain and Germany have committed themselves to raising development aid bit by bit to reach 0.7 percent of their gross domestic product. Melkert advises other wealthy nations to also maintain their development aid goals.

“There’s no alternative to investing in development goals,” he said. “I hope that the G20 summit will help, I hope that the new American administration under Obama will support the Millennium goals even more. I hope that the Europeans keep their promises and invest more in development policies each year. And I hope that the growing middle classes in Africa, Brazil or in India pay their taxes and use this tax money to fight poverty.”

Poverty remains a major challenge

Although the global fight against poverty has made progress, the percentage of poor people in Africa hasn’t gone down at all, due to the continent’s fast-growing population. With a poverty rate of around 50 percent, the share of extreme poverty in the total population hasn’t changed, and Melkert fears it could even get worse.

“We have to be really ambitious here and take the problem of poverty really seriously,” he said. “With this financial crisis, more people will be forced into poverty than in years past.”

There are worries that more Africans will slip into poverty

The IMF has revised its growth projection downwards and has forecast an economic growth rate of just 3.4 percent for sub-Saharan Africa. But all African governments have to take political responsibility, says Melkert. He points to examples from Latin America, saying Africa should learn to also create effective social security systems and incentives for development.

“Good systems have been established in Latin America,” he says. “There, families get money if they send their children to school or get them vaccinated. Africa should follow this example. The World Bank, the UN or bilateral donors could financially support such a system. That would help the poorest people to have a minimal income to buy food, send their children to school or care for their health.”

He advises the international community to be patient and take a long-term view when it comes to supporting development goals – despite the global financial crisis.

“You don’t make development progress from one year to the next – it’s a question of 10 or 20 years,” Melkert said.

In France, debt and loans, as usual

In late June 2009, before the French Parliament convened in Congress at Versailles, President Nicolas Sarkozy announced the launch of a government bond issue aimed at individuals and not just at banks. It was “intended for finance investment for future”.

President Sarkozy's take office in May 2007

Here are my personal views on borrowing through French records.

Revenue, resources and bond issues

Initially, it sounds appropriate to consider the key differences between “revenue” and “resources” for a private company or a State, as well:

• The “revenue” is the annual turnover achieved by a company or the overall taxes collected by a state, from which “expenses” or “charges” are deduced to calculate the yearly profits or the balance due, if that event.

• The “resources” are made up of new loans and profits (if positive); they ensure financing the company or State needs, i.e. the refund of loan encountered, investments… and the potential deficit.

This recall of vocabulary may well figure out some evidence often mishandled by a regularly empty and specious political rhetoric:

1. A sound financial management should start from the deficit. Deficit comes from too low revenue or too high expenses, in order to deduct the amount of resources to find with the view to finance this deficit and to meet other needs. Doing otherwise, ie fixing the deficit depending on resources that could be gathered, is a rash fool policy!
2. If the financial markets have enough capacity to lend resources to the company or the State, there is no need to have a bond debt directly from individuals –which is always done in costlier conditions: individuals expect an interest rate higher than which is offered by banks (or they look ahead for a tax benefit). Alternatively, placing the bond debt with hundreds of thousands of people is inevitably more expensive than with a few dozen banks.

It may be decided –for purely reasons of corporate communication or political view– to borrow a modest annual funding requirement from individuals, although it is far more expensive. For instance, Electricité de France-EDF –a public energy supply company– borrowed €2 billion from the French individuals on a yearly overall bond debt of € 10bn roughly. And the State, through the voice of the president himself, plans to borrow round about € 10bn from individuals on an annual basis program loan of € 150bn…140 of which are made by markets, which could easily go up to 150.

Time is gone since the financial markets did not have enough capacity to accommodate the needs of some important EDF or public bonds in the 1980s: the Lepercq’s loans during the post-war years, the Pinay’s in 1958 or Giscard’s in 1965 then in 1973 could still appear justified. On the contrary, the Balladur bond debt in 1993 was no longer acceptable and that of Sarkozy in 2009 will not either: their sole function is political, in spite of the extra financial cost.

Claiming that such borrowing “brings new revenue to invest” [1] is a nonsense: we merely substitute an expensive outline of financing by another costlier. If by this we mean that the state will increase its capital spending proportionately to the amount of resources provided by this particular loan, we have to admit that the State has decided to increase the budget deficit as much –which points to an inveterate laxity again.

Finally, the insistence that the resources of this bond debt will only finance “productive” expenses is simply childish: the remaining loans will finance more widely the unproductive expenses –as it is true how money is “fungible.” Both in private companies as in the state budget, the pre-allocation of resources is a figment of mind.

Rigor, laissez-faire and Euro

After recovering from the late 1990s, which enabled France to qualify for the Euro, the period 2002-2008 has witnessed a creeping deterioration of the fiscal deficit and external accounts, which in total is equivalent to that of early years of François Mitterrand in 1981-1982. Although any turnaround plan equivalent to that of 1983 has come back on course, while public debt has doubled since then and despite the defiant words required in this regard on the campaign trail …

The truth of the matter is that, first, the external obligations linked to the risk of French franc crisis disappeared with the creation of the Euro. Conversely, the French government refused the forced substitution of “Maastricht criteria” (the deficit accounts should not exceed 3% of GDP) as evidenced by the constant postponement of the date of return to balance (in 2010, then 2012, then 2015…) –more often than not since the election of President Sarkozy in 2007…

In 1983, by denouncing the policy of restraint, the Communists and some Socialists in the movement of Jean-Pierre Chevènement, elaborated a scholarly quibbling about the difference between the “chosen” (or “virtuous”) deficit, which “prepares the future” by the investment, and “suffered” deficit that would increase the debt [1].

The same retractions are now ran again in President Nicolas Sarkozy’s preach and his finance minister Christine Lagarde, in an attempt to evade European strain of returning to financial balance by making a scholarly distinction between structural, crisis and activity support deficits.

These quibbles were no more selected in 1983 by the fiscal authorities (President François Mitterrand and his Finance Minister Jacques Delors) than they are today by European leaders, responsible for the accuracy of fiscal policies of each State acceding to the Euro. At the most, the neo-lax of 2009 will try to delay a little the maturity date of austerity policy –such as lax did in 1982 when they delayed it a year. Even though it is pleasant, in the meantime, to spot their discourse converging with those of former radicals as Marchais, Chevènement and so…

The financial reality will retrieve its rights within a year or two –let nature reclaim! Then the economic recovery will allow European authorities to require a reorganization of the French management of public finances. As a result, France would then be punished by an increase of 3 percentage points of VAT orthrough the social tax called CSG. As Germany did in 2005, when its situation deteriorated as that of France, a situation that led Chancellor Schroeder to take corrective measures (that French President Chirac had refused to endorse). Predictable in the short term, this increase would also bridge the gap of current € 30 billion in Social Security; whose mere existence, next to deficit of state budget, should be an intolerable scandal for those who have campaign saying that the debt was unsustainable, and its transfer to future generations unjustifiable.

The future government bond is a substitution “resource”, an undeniably ordinary one. As it does not represent a new “revenue”, which can only come from taxes that will inevitably join to cost savings in order to balance the public budget in the mid term.

French version over here.

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[1] Nicolas Sarkozy veut rassembler autour de l’emprunt, Le Monde, 23 June 2009

Fighting bank recidivism

From Martin Wolf’s analysis in Financial Times.

It would take little for banks to have hands free again. What emerges from the crisis is a system even worse than the one who had caused it. The bank rescue lets the banks free hand to remake the same mistakes. It is urgent to raise prudential ratios.

Henri Cartier-Bresson · Shanghai (Run on Bank)

The panic of autumn 2008 now tends to fade. However, the period during which it is possible to draw lessons and make changes is nearing completion. Without radical changes, another crisis is inevitable. It could even happen much sooner than we think.

Never again? This is probably asking too much. But avoid “it” happening again quickly is crucial. Financially, politically and morally, governments cannot afford repeating this crisis in the short term: the lives of so many people can again be sacrificed to the whims of a few irresponsible.

So far, what emerges from the present crisis is a financial system even worse than that which had provoked. The survivors form an oligopoly of financial monsters too big and too interconnected to fail. And they won. Not because they are necessarily the most healthy institutions, but because they are the ones who received the largest support. One can easily imagine how they will behave when you consider all the devices that encourage risk taking.

What should we do? The most common response recommends tinkering some regulatory safeguards. You’d better worry about aligning the deck chairs on the Titanic: perfectly futile.

The proposals recently put forward by the US Treasury would fall partly into this category. Now the financial system must be protected from its own clumsiness at managing risk. In addition, it will not change it by external control, but only by redefining the system of incentives and bonuses.

The starting point must be the famous “too big to sink”. We need a credible system capable of dismantling huge financial institutions if necessary. The proposals are more attractive to look at the “good banks” in which creditors, in want of warranty, become shareholders. It would be easier if, as proposed by President Barack Obama and as demonstrated Mervyn King, governor of the Bank of England, a regulated institution was obliged to submit a plan for orderly stop its activities.

However, bank failures are like buses: you do not see one for hours and suddenly there came a half-dozen at once. The authorities cannot credibly promise that they would be willing, at a systemic crisis, to accept the failure of all affected establishments. This would lead to a particularly serious panic. The “too big and too interconnected to sink” is indeed a reality. And it is because, as recently remarked Andrew Haldane, from Bank of England – his speech “Rethinking the Financial Network” is available on Bankofengland.co.uk – the financial system is a network increasingly tight.

If institutions are too big and too interconnected to sink, and no satisfactory structural solution can be found, then we must identify alternatives.

The most obvious would be to raise considerably the amount of capital required and to pay greater attention to liquidity. Today, major financial institutions operate virtually with no capital: in the United States, the average debt ratio of commercial banks was 35 to 1 in 2007; in Europe, it was 45 to 1. This allows shareholders to play all out with results that we previously witnessed.

Let financial institutions being managed by the interests of shareholders who provide only 3% of funds intended to be loaned, is pure folly. To align the interests of managers with those of shareholders is even more insane. Given their current capital structure, major financial institutions have a real incentive to play with taxpayers’ money.

How much equity would be reasonable for systemically significant institutions? The answer is: “Much more than today.”

Moreover, the risk that capital needed could be exposed should not be evaluated based on banks models, which are unreliable. Shareholders’ funds should be at least 10% of assets. In the U.S., there was a time when it was much more.

More important capital equities might be a good way to internalize negative externalities – and more precisely the risks – generated by an institution in respect of the rest of the system. Ideally, therefore, the capital requirement might be correlated to the weight of systemic schools, as recommended in the latest annual report of the Bank for International Settlements (BIS). Moreover, these requirements should be calculated based on all the activities derived from fully consolidated accounts.

As part of a financial system much better capitalized, it is also relatively easy to implement a system of macro-prudence, while the required capitals increase during booms and decrease during decline periods.

Again, the higher the proportion of shareholders would be important the less would be worrying to see the bonuses of managers aligned with theirs. Even then, as it is the taxpayers who bear the residual risk, regulators should exercise control over the premiums paid to managers.

Two problems remain. First, transition. Secondly, level of regulation.

Regarding the first point, requiring now more significant capital ratios would jeopardize the recovery of the economy. It is better to imagine a long transition period, stretching perhaps over a decade.

For the second point, it is obvious that we cannot let the so-called “shadow banking system” operating outside any capital constraint if some entities are systemically significant –as we got evidence with funds acting on the money markets.

In addition, capital equity requirements might be imposed in all significant countries. The United States is powerful enough to urge a movement in this direction –by requiring any foreign bank operating in their territory to be properly capitalized.

The conservative method of small steps, not radicalism, is today the most risky option. What must first apply this radicalism? The answer is obvious: the system of premiums and bonuses, of course.

Does protectionism deserve a severe rebuke ?

In late January, workers at the Total Lindsey Oil Refinery, UK, protested against the recruitment of Italian and Portuguese workers. The strikers brandished banners urging to keep back “British jobs for British workers”. On February,  40 hired workers returned to Portugal.

Simultaneously, Argentina has imposed restrictions on importing televisions, Ecuador has increased tariffs on mobile phones, India has banned the admission to Chinese toys for six months, Europe has increased export subsidies for butter and cheese, Russia has increased tariffs on imported cars, the U.S. Congress voted in January the “Buy U.S.” clause when reviewing the president Obama’s plan (once after George Bush announced tripling the tax on Roquefort). And in France, president Sarkozy granted a government  loan to carmakers in exchange for commitments on maintaining home production and employment.

Confronted with the crisis, countries are increasingly working for reflation plans with preferential conditions for their domestic producers, so that at many forums (Davos in late January, G20 meeting in April, EU conference in June), the alarmist statements about an alleged threat of protectionism have amplified.

This reopens the debate on a taboo subject: protectionism. Is protectionism an overall mistake? Is it completely wrong? Does protectionism deserves a severe disapproval?

Wasn’t European protectionism the founding principle of the Common Market?  The goal: bringing countries closer together by geography and culture, but economically disparate. Customs duties on the borders of Europe defined a zone of free trade in the initial model of the CAP (import duties and export aid):  Free Trade and Protection in Europe towards countries outside Europe. Helping less developed countries to catch up is a reasonable and challenging project –without risking the collapse of entire industries because of unfair competition due to the rapid upgrading of the countries concerned.

In addition, if you consider the reasons that led Europe to face global competition (functional sclerosis, and obstacles to free enterprise, continual union arm wrestling…) we may come to a conclusion: the basic necessity in organizing the involvement inside the companies in order to share profits and risks in the form of forced savings (stocks buyout) –thoroughly related to salaries and proportionally linked to the costs of the consolidated turnover. No more, no less.

Negative externalities and taxes: a contribution to the debate on “junk food”

>> Haga clic aquí para la versión en castellano

Alcohol and cigarette products are usually subject to high taxes. This occurs because the economic theory acknowledges that the price of these products does not reflect the true social cost of consumption.

Thus, a Pigovian tax [1] is applied to neutralize the externalities [2] caused by these products in both consumers and society.

Barcelona · Array of fruits and vegetables at La Boqueria Market

In this regard, developed countries have begun to consider the option of raising the tax burden of the food low in nutrients and high in saturated fats and carbohydrates, also called junk food as a way to lighten the deficit and in turn combat obesity [3]. If implemented successfully in the case of tobacco or alcohol, why do not tax the junk food and improve the way consumers make decisions about their diet?

In return, during the first half of 2009, interesting reports have been published focused on discussing the aspects of the issue. Thus, Engelhard, Garson and Dorn (July 2009) [4] put the junk food as a major cause of obesity, with direct consequences for the economy through a decline in productivity per worker and increased costs for medical care. United States estimates that medical costs of obesity are $ 700 higher than the costs of a thin person.

However, Yaniv, Tobol and Rosin [5] argue that the implementation of taxes on junk food has technical shortcomings. For example, there are too many possibilities of interpretation to decide what products should be considered within that tax. A hamburger has high levels of fat, protein and calories but these are also necessary for metabolism. In addition, unlike the case of cigarette or alcohol, consumption of junk food does not produce a direct negative externality on the welfare of someone other than the individual’s. Therefore, we must ponder the results of these surveys further to soon begin the implementation of tax measures that directly affect the purchasing decision of consumers.

[1] A Pigouvian tax is a duty charged on a market activity to correct the market outcome, if there are negative externalities associated with the market activity.
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[2] In economics, an externality or spillover of an economic transaction is an impact on a party that is not directly involved in the transaction. In such a case, prices do not reflect the full costs or benefits in production or consumption of a product or service.  A negative externality occurs when an individual or firm making a decision does not have to pay the full cost of the decision. If a good has a negative externality, then the cost to society is greater than the cost consumer is paying for it. Since consumers make a decision based on where their marginal cost equals their marginal benefit, and since they don’t take into account the cost of the negative externality, negative externalities result in market inefficiencies unless proper action is taken.
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[3] An individual is classified as obese based on his body mass index (BMI), which shows the relationship between weight and height as an indicator of body fat. An adult is classified as “overweight” if his BMI is between 25 and 25.9. If his BMI is greater than 30 he’s classified as obese.
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[4] ENGELHARD, Carolin; GARSON Arthur; DORN Stan “Reducing obesity: Policy strategies from the tobacco wars”, Urban Institute. July 2009.
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[5] YANIV, Gideon; ROSIN Odelia; TOBOL Yossef. “Junk-food, home cooking, physical activity and obesity: The effect of the fat tax and the thin subsidy”. Journal of Public Economics. June 2009.

Economics in the nude

Unempirical hypothesis in economic theory are subverting efforts to work out environmental threats

Economy stark naked

The pattern maker fathers of neoclassical economics –the current core assumption of the global market system–  were supposed to transform their scope into a scientific discipline. But what is not commonly acknowledged is that these now celebrated economists  –Jevons, Walras, Edgeworth and Pareto–  developed their hypothesis by adjusting equations from the 19th century physics that finally became outdated. Unluckily, it is clear that neoclassical economics has also become obsolete. The assumption is based on unscientific statements that are delaying the implementation of workable economic solutions for global warming and other worrisome environmental threats.

The physical theory that the creators of neoclassical economics used as a pattern was formulated in reply to the inability of Newtonian physics to rationalize the experiences of heat, light and electricity. In 1847 German physicist Hermann von Helmholtz framed the conservation of energy rule and assumed the existence of a field of conserved energy that fills all space and merges these observable facts. Later in the century James Maxwell, Ludwig Boltzmann and other physicists developed better explanations for electromagnetism and thermodynamics, but meanwhile, the economists had borrowed and changed Helmholtz’s equations.

The approach that economists employed was effortless and illogical—they replaced economic variables with physical ones. Convenience utility (a measure of economic well-being) took the place of energy; the sum of utility and expenditure replaced potential and kinetic energy. Many eminent scientists warned the economists that there was definitely no basis for making these swaps. But the economists ignored such analysis and carry on claiming that they had transformed their line of work into a strictly mathematical scientific discipline.

Weirdly, the genesis of neoclassical economics in mid-19th century physics was elapsed. Successive generations of conventional economists admitted the assertion that this hypothesis was scientific. These peculiar occurrences make clear why the mathematical theories used by conventional economists are built on the following unscientific assumptions:

• The market structure is a closed circular flow between production and consumption, with no inputs or outputs.

• Natural resources are present in a domain that is separate and distinct from a closed market system, and the economic value of these resources is determined barely by the dynamics that operate within this system.

• The cost of damages to the external natural environment by economic activities must be treated as positioned outer the closed market system or as costs that cannot be built-in in the pricing mechanisms that operate within the system.

• The external resources of nature are largely boundless, and those that are not can be replaced by other resources or by technologies that diminish the exploitation of the limited resources or that depend on other resources.

• There is no biophysical limit to the expansion of market systems.

If the environment preservation crisis did not be there, the fact that neoclassical economic theory grants a consistent base for running economic activities in market systems could be considered as adequate justification for its common purpose. But since the crisis does exist, this speculation can no longer be considered as useful even in pragmatic or utilitarian terms for the reason that it fails to meet what must now be regarded as a deep-seated prerequisite of any economic theory  –the point to which this theory permits economic activities to be harmonized in environmentally responsible conducts on a global extent. Because neoclassical economics does not even recognize the costs of environmental harms and the limits to economic growth, it represents one of the utmost obstacles to fight climate change and other threats to the planet. It is imperative that economists work out new theories that will take all the concepts and realities of our global system into account.

A few number of economists over the past two decades, including such top personalities as Kenneth J. Arrow, have expressed doubts about the effectiveness of neoclassical economic hypothesis. However, the most express challenges to obvious postulations in this theory have been made by the game theorists. Such as, these academics have challenged the supposition that economic actors are absolutely rational, act upon fixed decision-making rules and are unable of making dreadful choices. In conservative neoclassical economic theory, the natural laws of economics supposedly find out the best possible outcome of a cost-effective process and economic actors lack of all evident human characteristics. This theory presupposes as well that the sphere of economy is established and static and that economic actors are completely rational entities who do not talk back. When getting through the box of human bias, the game logicians have been obliged to conjecture a growing number of unplanned variables to justify the decision-making of individual economic actors. And this enlightens why the history of game theory is marked by a recurrent regression into the incredible complexities of language and culture. As the economist R. Sugden states it [1]:

“There was a time, not long ago, when the foundations of rational-choice theory appeared firm, and when the job of the economic theorist seemed to be one of drawing out the often complex implications of a fairly simple and uncontroversial system of axioms. But it is increasingly becoming clear that these foundations are less secure than we thought, and that they need to be examined and perhaps rebuilt. Economic theorists may have to become as much philosophers as mathematicians.”

This explains why the United Nations Framework Convention on Climate Change (1992) failed to protect the climate system, why the Convention on Biological Diversity (1992) did not even begin to reduce losses in biodiversity, and why the U.N. Convention to Combat Desertification (1994) did not slow, much less, reverse this process. However,   the cooperation of the most part of economists and environmental scientists  –that the world needs without delay–  may occur when both recognize the unique opportunity they have to look after the existence of current mankind and the future existence of its descendents by resolving the crisis in the global environment.

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[1] Robert Sugden, “Rational Choice: A Survey of Contributions from Economics and Philosophy,” Economic Journal 101:4 July, 1991, p. 783.

Africa’s Economy at the Crisis Crossroads

The United Nations Conference on Trade and Development (UNCTAD) published on June 25 the “Economic Development in Africa 2009” [1]. It is focused on the promotion of economic integration in the region, which should become a key factor for boosting and diversifying economic growth, expand markets and attract more foreign investment, especially in the context of current global financial crisis.

Regarding the effects of the financial crisis in the African region, it was noted that the main channels are through the fall in exports, reduction of investment flows and lower revenue collected by governments. In this regard, according to the projections of the African Economic Outlook (AEO) in May, it is pointed that the region could grow 2.8% in 2009, much less than the growth rates of 5.1% in 2008 and 6% in 2007.

The impact of the global financial crisis would already be reflected in exports and reduction in prices of raw materials. A study of the organization ActionAid, says that the financial crisis will cause African economies lose up to 49 billion dollars during 2009 due to the drop in international aid since the fall of exports, among others. The report said that countries that liberalized their markets and that were large enough to attract significant investments will be most affected by the financial crisis, starting with South Africa that could see a drop around 20%. However, they also state that Africa is now better prepared to face the crisis than it was 10 years ago.

[1] Economic Development in Africa 2009. Strengthening Regional Economic Integration for Africa’s Development. UN. June 2009.

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[1] Economic Development in Africa 2009. Strengthening Regional Economic Integration for Africa’s Development. UN. June 2009.

Obama Outlines a New Banking System

President Obama presented yesterday the expected reform of the US financial system. It is widely considered as the primary source of the crisis that led global markets to the brink of collapse at the end of 2008. The President basically cleared the key lines, the frame where successive changes in legislation should be built –but whose application is expected to be tough both in the Senate and in the House of Representatives. It is likely that Treasury Secretary Timothy Geirthner, will upgrade details during his appearance scheduled today.

Definitely, the US President did not spare critics to the banks when analyzing the situation. However, he either did not skirt to mention mistakes that -due to insufficient or maladroitly- regulatory bodies did incur. As of now, the Fed will hold additional powers -almost full- to monitor any activity, including the full range of products, services and benefits already included in the system or on the point of being so. Everything to be done in an intricate attempt -in the words of Obama himself- of safeguarding the balance between the free market and state intervention. In other words, ensuring that financial markets regain their momentum, while avoiding that risks just happened recur.

Undoubtedly, this will be the core of controversy in the process of successive parliamentary proposals, but blockages will appear from the financial system itself, where voices have begun to emerge suggesting that given that the worst is past, it would be reasonable to return as much as possible to normal. In fact, after presidential intervention, some appreciate that the original plans become softer -due to pressures on the White House from the sector. Whatever comes, it is likely that, beyond the threat of collapse of the system, there is less willingness to accept greater control now than six months ago.

Nothing different what is happening on this side of the Atlantic. The European Union has not implemented yet its own reform. The reorganization is necessary: if the imperative of globalization made possible the rapid spread of financial creativity –coming from the United States- it originated the dysfunctions that quickly spread out the planet too.

Probably the European regulation will require a different reform, as the starting point is different and the banking profile system, as well. It does not mean that this innovation will represent less difficulty.

So far, the recommendations of the Larosière Report -prepared at the request of the European Commission- seemed to have focused no particular enthusiasm. Hence, there is little disposition in the Euro area to correct the singularity that the ECB-European Central Bank determines the  monetary policy but has no legal command to enforce its banking supervision -unlike the US Fed and the Bank of England. This is not the only impediment that is seriously compromising in parallel, here and there, the implementation of changes (changes that G20 members diagnosed as urgent prerequisites.)

Sarkozy’s Basket

… or the French way against economic commonplace topics

French investments might have seemed like a dreadful idea for the first two years of French President Nicolas Sarkozy’s term. After his election in May 2007, Sarkozy looked like a huge disappointment – unless you really enjoy tabloid stories. He divorced his wife, married the dramatically old fashioned ex-model Carla Bruni, and went on an enviable honeymoon in Egypt – but appeared to do nothing useful about France’s economic problems.

But now there’s some good news for French investments. As many good Frenchmen, Sarkozy might prefer first to concentrate on his private life when elected President. Once his private life is now complete, he’s been able to spare some time for France’s economic problems. And the results for France’s future economic performance and French investments are quite positive.

First, Sarkozy got rid of the 35-hour week. This economy destroying measure, by which companies were forced to set up a maximum 35 hour workweek, was brought in by Lionel Jospin, Premier Socialist in 2000, and has embedded itself throughout the French economy, increasing labour costs, dropping productivity and damaging French investments. Removing it will not make much difference for big business – as one union leader said “nobody wants to renegotiate the 35 hours and reopen Pandora’s box,” but it will make a huge difference for medium-sized and smaller businesses, which will be able to match their workforce with the demands of their business, without being forced to get into the rigid models by the state.

Sarkozy has also passed reforms freeing up France’s retail sector to increased competition with longer operating hours, tighter regulation of unemployment benefits, and autonomy for firms to negotiate directly with employees rather than deal with a union.

In addition to these economic reforms, Sarkozy has pushed through constitutional reforms, limiting the president to two five-year terms and giving the legislature more power to introduce legislation. That is not the big reform formerly announced, but just a first step in the way for.

The remarkable feature of Sarkozy’s split of reformism is that the French unions have been unable to connect and rely with the streets of Paris with major demonstrations, as they had done to stand several previous bursts of reformism in the last decade. A Day of Action protest in 19 March had only half the expected audience and the May nationwide strike had only 4% support. Point barre, end of discussion.

But Sarkozy’s tactic has been to move forward with reforms on several fronts at once; this seems to have worked during 2007, and Sarkozy’s opinion poll numbers have recovered from lows hit till late autumn of 2008, when the financial breakdown started. Yet, it is true that his attractiveness has endured since, similar to several of his colleagues in the European neighbourhoods.

Facts and figures to Sarkozy’s advantage

The benefits of these reforms will be seen most clearly in France’s next period of economic expansion, which may not be immediate because of the general global slowdown. France’s gross domestic product [GDP] is expected to decrease by 0.7% in 2009, according to the Economist, a bit better as the average for the 15-nation Eurozone as a whole.

On the bright side, inflation is expected to be only -3.2%, below the Eurozone expected average and well below U.S. inflation rates. The balance of payments deficit is only 1.6% of GDP, well below both the United States and Britain, in spite of the current high valuation of the euro. Euro short-term interest rates are currently 3.55%, above France’s inflation level, and French long-term government bonds yield 2.8%, well above inflation, so there is no danger of an inflationary spiral. A deflationary situation is yet possible in early autumn 2009,

French economy handicaps

It is a mandatory to get out the French companies off public handouts: a sort of usual public allowances run between companies, authentic availability of free / cheap working force, trainees and complete dependant underdogs, lack of competition in many sectors, lack of penalties for corporate officers, abusive tax exemptions / reductions, volunteer lack of judges at labour assessment and safety inspectors. The french are among those of the OECD who work most for a grotesque wage related to the cost of living. It is most necessary to get effective control over the business and tax them only on their real add value and their employment rate. It is time enough of all these banks, estate agent or other telephone vendors that serve no purpose except to increase inflation and delay the French competitiveness. Investing in university research and development instead of distorting the economic market by offering it to a band of idle heirs.
Also, get out of the dichotomy between a left which would defend assistantship (giving out benefits) and a right who supposedly takes on all of the hard work.

Guru of protectionism Emmanuel Todd urge us to protect and survive

(Translated from my French blog  “Résident de la République” )

The financial crisis is convulsing politics in unexpected ways. The triumph of an inexperienced black liberal senator in the US presidential election may yet be counted as the first surprise of many. What else could be in store?

Emmanuel Todd, the French historian, made a name for himself by predicting the collapse of the Soviet Union. He has been canvassing into his crystal ball again. In his latest book, Après la démocratie (After Democracy), he brings to mind the alarming possibility of a post-democratic Europe reverting to ethnic disasters and dictatorship.

The author’s starting point is incredulity that a politician as “vacuous, violent and vulgar” as Nicolas Sarkozy could ever have been elected president. As interior minister, Mr. Sarkozy proved he was ill-suited to high office by inflaming social tensions during the riots in France’s troubled suburbs, Mr. Todd argues. Mr. Sarkozy’s first months in power have only confirmed this judgment. As incompetent in economics as in diplomacy, the hyperactive Mr Sarkozy is going nowhere fast, the author contends, rather like a cyclist pedalling away on an exercise bike.

Yet Mr. Sarkozy’s election is a symptom of the sickness of French democracy rather than its cause. Once, French politics was neatly defined by its ideological divisions: the Communists represented the secular, internationalist, working class; the Gaullists represented nationalist, conservative, Catholic values. But the collapse of religion and ideology has destroyed that framework, leaving behind a politically atomized society wide open to manipulation by the likes of Mr. Sarkozy or Silvio Berlusconi in Italy. Tough economic times will only tempt such populist politicians to stoke public fears of immigration and to adopt ever more authoritarian ways.

However, the author is equally scathing about France’s opposition Socialists, a party of cosseted bureaucrats who have betrayed the workers they once represented. French civil servants do not have to worry about the corrosive effects of globalization because their own jobs cannot be sent offshore.

Mr. Todd paints a picture of a collusive political-media elite that benefits from globalization while being disconnected from the people who suffer from it. As arrogant as the aristocracy on the eve of the 1789 revolution, this elite blithely ignores the views of voters whenever it suits them. French voters rejected the European Union’s constitutional treaty, but a modified version was later adopted by parliament. Britain’s voters protested massively against the war in Iraq, but the government sent in the troops regardless.

Ordinary workers blame cheap-wage China for killing jobs and compressing wages. Instead, France’s leaders scapegoat Muslim immigrants and target militant Islam, justifying an unpopular intervention in Afghanistan. Employees want Europe to protect their jobs but, in spite of his increasingly protectionist rhetoric, Mr. Sarkozy – and the opposition Socialist party – still adhere to the free-trade dictates of the EU and the World Trade Organization.

In Mr. Todd’s reductionist view, globalization is simply the exploitation of cheap workers in China and India by US, European and Japanese companies. He is therefore an unabashed champion of European protectionism. Erecting trade barriers would increase European wages which, in turn, would increase demand and boost trade, he argues. The “social asphyxia” that is sucking the breath out of democracy would disappear.

The British, whose very identity is wrapped up in free trade, will never buy protectionism, Mr. Todd suggests, but Germany and the rest of the EU could be persuaded.

At times, Mr. Todd’s anger outstrips his analysis. Too many questions are left hanging. Does globalization not benefit western consumers? Why would Germany, one of the great exporting nations, turn its back on free trade? Has Mr. Sarkozy not performed well in the crisis? But there is no doubt that the intellectual assault on free trade is intensifying. Mr. Todd’s book is a passionate assault in that war of ideas!

A tip: Do not run to buy it at the bookstore. Although some assumptions are attractive at first sight, the overall analysis, on an anthropological and demographic basis (Emmanuel Todd’s “primary business”), confines often to correlations too hastily constructed and argued quickly. Todd’s argument boiled down to something like: After democracy = “After sarkozysm” too simplistic to my liking. If you are interested in the future of democracy, rather try Wendy Brown, professor of political science at the University of Berkeley (Edgework: Critical Essays on Knowledge and Politics Out of Politics and History). This time, the analysis is all the more exciting and not a French framed one. Of course, keep in mind Colin Crouch’s classic Postdemocracy.

Related Posts: “After Democracy,” Emmanuel Todd: French Society in Crisis.

European Parliament Gives Support to Internet Freedom

The European Parliament has decided that ISPs and regulators, such as Hadopi in France, cannot restrict individuals’ access to the internet.
But this vote approving online freedom of expression is not the conclusion of the EU debate taking place between the European Parliament and Council. Since the Parliament has not agreed with the Council, the proposals will now enter the EU’s conciliation procedure where both bodies will try and reach a compromise.
The discussion came out from the modification of the Telecoms Package 2002 and specifically, one of the five directives that make up the package, called the Framework Directive. The reform cast the possibility that a three strikes measure –riposte graduée– proposed by the French President, Nicolas Sarkozy, could be adopted.
A three strikes law would kick file sharers and illegal downloaders off the internet for up to a year if they were third-time offenders. The decision by the Parliament not to adopt Sarkozy’s proposition is the second time it has come to this conclusion.
During the first reading of the proposal, Parliament formed what is known as Amendment 138. The Amendment reads, “No restriction may be imposed on the fundamental rights and freedoms of end-users, without a prior ruling by the judicial authorities, notably in accordance with Article 11 of the Charter of Fundamental Rights of the European Union on freedom of expression and information, except when public security is threatened in which case the ruling may be subsequent.”
Catherine Trautman, author of the other report relating to the Framework Directive, revised the text in April to weaken the Parliament’s Amendment and secure agreement between the Council and the Parliament, before the elections in early June.
Citizen rights groups, such as La Quandrature du Net were outraged by Trautman’s changes and called on MEPs to side with the previous version of the report, which contained the amendment.
Now the groups have welcomed the decision of the MEPs; i.e. Jérémie Zimmermann, co-founder of La Quadrature du Net, described it as a “victory”. “A formidable campaign from the citizens put the issues of freedoms on the internet at the center of the debates of the Telecoms Package,” (…). And “the massive re-adoption of amendment 138/46 rather than the softer compromise negotiated by rapporteur Trautmann with the Council is an even stronger statement,” he concluded.