The Truth about the Economy

The End of World Hunger

Two weeks ago, Oxfam launched its new campaign "Grow" for a world without hunger. It is not a utopia  for people who want to do good and dreamers of all nations. It is a real plan based on achievements of  forward thinking governments and communities - for example, the government and communities of Brazil who succeeded in halving hunger in just 15 years. 

In support of this campaign, Desmond Tutu, the archbishop emeritus of Cape town and Nobel Prize writes :  "World hunger is man-made and only we can end it (...) Hunger is not a natural phenomenon. It is a man-made tragedy. People do not go hungry because there is not enough food to eat. They go hungry because the system that delivers food from the fields to our plates is broken".* 

If the world produces enough food to feed everyone, why doesn't it work? Susan George, an American political scientist and activist explained the reasons of world hunger in a brilliant book** . Her staring point  is the contradiction that Marx analyzed 150 years ago , that is capitalism is the most productive system in history and yet creates the most extreme wealth alongside the greatest extreme of human misery and deprivation. In this regard, hunger is not a fatality: it is the product of a system of control organised by large corporations over the food systems. It is not just a mere issue of income distribution, although this is related to consumption patterns, which means that the system will encourage the production of food stuffs and other goods which yield the highest profits and which are therefore geared to satisfy the needs of those who can pay!


Recent analysis ( Oxfam International) shows that the food system is collapsing: early 2011 almost a billion people suffer from hunger and their number will rise considerably if no measures are taken. Over the next twenty years  prices for some basic food products will increase from 120% to 180% , whist water demand will rise by 30% and arable land will reduce in per capita terms.  

Combating hunger  requires a new approach in the way we produce and share food. We need first of all a new global governance to prevent food crises. We must redirect investments from large producers to poor producers and provide them the support they need to adapt to a changing climate.We must end policies which reward companies for turning food into engine fuel. We must introduce a much stricter regulation for commodities markets: the cereals market is controlled by just three big corporations - which control 90% of global trade and create price volatility. Finally, a  global deal on climate change would not only be desirable but necessary in order to influence more responsible behavior of consumers, in choosing, for example products which are produced in a fair and sustainable way. 

We should not be naive. Many governments and companies will strongly oppose any change in habits, ideology or the pursuit of profit. The call for change is a matter for all of us.Time has come to join any initiative for which it is worth struggling. 

* See http://www.theage.com.au/opinion/politics/world-hunger-is-manmade-and-only-we-can-end-it-20110601-1ffxq.html#ixzz1OI1NNkFg


** How the Other Half Dies: The Real Reasons for World Hunger (Penguin) 1976. Reprinted 1986, 1991

Water should not be privatized

Historically, water was privately owned in Europe and in the United States in the mid-19th century. But the role of the private sector lost of its importance in the 20th century as the public sector owned water utilities as well as other basic services. The privatization of water came again in the early 1990s after the fall of the Berlin wall and the rise of free market policies. The World Bank and the IMF played an important role in this process through the conditionality of their aid. As water privatizations failed , especially in Latin America, there is a growing movement against privatization. 

The basic argument for privatization is that it will improve access and efficiency for the poor and reduce child mortality in Third world countries. Is it really necessary to privatize to ensure these goals are met? 

As a basic human need, water should be a responsibility of governments. Transfer of control to a private entity that seeks to maximize profits reduces the role of government and public accountability. It has a negative impact on low income people as prices increase and it affects the quality of service. Corporate social responsibility is rarely applied, as water companies do not really care about the well being of people. If people cannot afford the water service, should they be excluded from access to a key public good? 

Private multinational companies do not have a stake in the communities in which they operate. They tend to restructure existing companies, fire employees and reduce their benefits and hire new ones. Is this to the benefit of small, poor communities? Although full privatization is rather an exception today, being limited to England and Wales, Chile and some cities in the United States, the so-called public-private partnerships (PPPs) - which are the most common form of private sector participation in water supply and sanitation - are often a way of giving maximum advantage to the private sector and increasing the fiscal burden through investments to the public sector. In fact many of these agreements fail to include adequate public participation, contract monitoring and accountability. 

Another important point concerns the lack of environmental responsibility, in particular the impact on local eco-systems and downstream water users. Private companies, which seek to make more money for the sale of more water, may neglect the potential for water use efficiency and conservation improvements.  

There is no such thing as good or bad privatization. The logic is driven by profit maximization, which often implies higher prices above social costs and poorer quality of service. People should then be able to reclaim their water systems from private entities and complain in case of unaffordable rates and non-cost effective delivery. 

Today and tomorrow, in Italy, more than 20 million people will vote for a referendum to abolish  a government decree to privatize  the provision of water and sanitation in all local communities  and to allow private companies to make profits beyond cost recovery. The reason is that the market for water services has expanded considerably as prices increased by 65% since 2002 and that the State has invested massively over past years - over 64 billion euro- to repair the damaged infrastructure which produced enormous efficiency losses (47 % of the water supplied through the network is being lost). Private companies will then maximize their profits without having to invest in the water infrastructure. 

We should vote YES, for the abolition of this law, in the interest of people and communities.

Re-examining inequality

During four decades the prevailing idea about economic inequality was that of an U-inverted curve where disparities in income grow in the early stages of development and then decrease in the more mature stage. This theory, which is known as the 'Kuznets-Williamson' model, led to consider growing inequality as inevitable in the process of economic development. The so-called 'new economic geography' school initiated by the work of P.Krugman has implicitly assumed increasing returns and imperfect competition, which lead to agglomeration effects and polarization of economic activity. Decades ago,  a great French economist,  François.Perroux developed  the idea of 'growth poles' which explains that growth is by essence an unbalanced process. Albert Hirschmann* once likened  development  to the break up of traffic jammed in a tunnel. At first, progress in some lanes gives people in the stalled lanes hopeful expectations for the future. But if their lanes remain stalled long after other lanes move, frustration can mount and provoke radical behaviour, like jumping the median strip.

Although economic development makes ultimately societies better off,  the basic assumption was  the existence of a trade off between equity (or equality) and growth (efficiency) due to the fact that assets and skills are distributed unevenly in the population,  economic development will inevitably be uneven. The benefits for few will then trickle down on the poor in the form of fiscal transfers, taxes and public goods (schools, hospitals, public transport, etc...).

In fact,  recent trends on poverty and social exclusion show that they are widespread in most advanced economies ( in Italy, according to a recent report published by the national statistical office, almost a quarter of the total population is at risk of poverty). This seems to contradict the theory based on the U-curve of inequality. In many western countries, inequality has started to rise again over the last two decades, after a period of decrease. Italy is today one of the countries with the highest Gini index (which measures inequality in income distribution). This means that the relationship between growth and inequality is more complex, and is often conflicting.

Italy is again an emblematic example as it is a relatively young nation with a persisting dual structure between the North and the South. Until a few decades ago, the State and households were the main providers of  wealth and 'welfare' in which there were no major tensions between the  increase of  wealth and its distribution among people; in fact more than three quarters of households are owners of their houses, which is now a myth for young people. In the 50s and the 60s, the welfare State has contributed to reduce substantially inequality among individuals thanks to the provision of basic services such as healthcare, education, pensions and human rights for all. Today, these services are much less guaranteed with dramatic consequences on millions of people who lost their jobs, houses or simply cannot buy enough food with their income. Think about the new poor, immigrants, the elderly, young families; those services  should become universal rights just as the right to work !

In a more complex and fragmented society (sometimes called  'post-modern'), with less State and less 'family' (as a safety net), growth leads to more inequality in income. In the past twenty years, the share of  output going to labour (wages) has strongly decreased relative to the share going to rentiers;  more recently, relative poverty has increased, especially among young people (as well as the elderly dependent on their pensions) which in turn contributes to a fall in consumption and output.

Without a substantial increase in equality among people, there cannot be any sustainable recovery of our economies, simply because of the weak demand of goods, but also the lack of enthusiasm and joy of living of the young generations. How can a country grow without them? Coming back to Hirschman's metaphor, imagine that after sometime we are still stopped while others get ahead, then we might be tempted to get to the other lane; traffic will be stalled again, and no one else is making progress, and then frustration and anger will prevail.

Studies on inequality and poverty should be revisited in the light of new advances in economic theory and empirical evidence on the poor. OECD has recently developed a 'Better life index'* which takes into account not only individual and household incomes but also public goods such as healthcare, schools, childcare infrastructure, efficient public transport, etc. In fact, a salary of 1000 euros in Frankfurt is not the same thing as living in Sofia, not only because of the differences in the provision of public goods but also housing and food  prices.
As Amartya Sen puts it, poverty and wealth are not only a matter of income and goods, but of capabilities, in other words,  the ability of people to transform resources in activities, freedom, development.

* The index allows citizens to compare lives across 34 countries, based on 11 dimensions -- housing, income, jobs, community, education, environment, governance, health, life satisfaction, safety, work-life balance -- giving their own weight to each of the dimensions. See the Better Life Initiative of the OECD to celebrate its 50 years since its foundation after the Marshall Plan:   http://www.oecd.org/document/63/0,3746,en_2649_201185_47912639_1_1_1_1,00.html

Joblessness and the mistake of 1937

Robert Reich (FT  June 1) argues that America is back to another double dip recession. His argument is very simple: America is not growing enough to reduce mass unemployment which now stands above 10%; corporate profits are soaring, but  the problem is on the demand side, with falling house prices and consumption; businesses are reluctant to hire more workers or raise wages of current workers feeding the vicious circle of deflation; external sources of demand are also reduced, with Europe's debt crisis and embrace for austerity, Japan's tragedy and China's fiscal tightening;  federal stimulus to the US economy has exhausted its course with purchase of Treasury bills and cuts in local government programmes.

Are we in a new phase of the crisis? P.Krugman points out that we are in a 1937 like situation, with  high unemployment but with rising prices due to a (temporary) swing on commodity prices. The fear of  (permanent) inflation led to an increase of interest rates and fiscal tightening which led to the recession of 1937-38. This decision offset the recovery period between 1933 and 1937 which was backed by an increase in government spending, the abandonment of the gold standard and monetary easing.

Economists and policy makers should have learnt the lesson of 1937. But this is not the view of the ECB, which is under pressure to increase interest rates. Maybe the next president, who will succeed to Jean Claude Trichet, Mario Draghi, - who studied at the MIT with Nobel prize F.Modigliani - will pay less attention to inflation and not repeat that mistake. The economic consequences could otherwise be dramatic, as the prospect of reducing unemployment will vanish and our politicians will find some stupid arguments to justify why this has not happened.

The real issue is jobs and governments need to focus on creating jobs. It is not about core inflation. The anger about unemployment, especially among young people, is widespread and is contributing to undermine confidence.

As the Romans used to say, errare humanum est, perseverare diabolicum - to err is human, to persist in erring is diabolical 

P.S: The measure of unemployment is still subject to controversy, even if we use modern standards. R.Schiller, an economics professor at Yale University  declared recently that the rate of unemployment is not estimated properly and is more likely to be around 16%, so even higher than European levels.