Sunday, December 27, 2009

A basic income for all

Despite moderate optimism on the economic outlook, there seems, however, to be a broad agreement that unemployment will continue to increase in 2010 and beyond. Apart from a minority of those unemployed who will find a job in line with their qualifications, the mass of unemployed will be divided in three categories: those that will have to accept lower wages for living below their qualification and education level; long term unemployed who will wait years before being employed; those, mainly over 50 who will never find a job. The main reason is that the crisis will lead to major restructuring of businesses; as a result of productivity gains the number of people made redundant will increase dramatically.

In this regard, traditional policies consisting of providing temporary benefits to the unemployed appear inadequate today. It is time to replace the old scheme with a new system which could yield huge benefits for the individuals as well as for the society as a whole. The idea of a Basic Income or Guaranteed Minimum Income is now gaining support in many countries such as Germany and Brazil. In substance, it aims to decouple income and work; as there are less jobs - but not less persons with their own needs and rights, governments need to find a way to distribute resources to people without a job. In its ideal form, a Basic Income is granted independent of other income (including salaries) , with no other requirement than citizenship. A Basic Income scheme aims to provide each citizen with a sum of money that is sufficient to live on. In some cases it is proposed in the form of a citizen's dividend (transfer) or a negative income tax (a guarantee) for citizenship. According to its supporters*, it has the advantage to grant to each unemployed the freedom to find an adequate job without having to accept unfair conditions for employment . But it is also seen as a powerful means to combat poverty and avoid economic insecurity (which is the main enemy of stability and democracy!) . However, critics have pointed out the potential work disincentives created by such a program, and have cast doubts over its implementability.

In fact, the idea of a Basic Income is an old one. It was put forward for the first time by the British political writer Thomas Paine as compensation for "loss of his or her natural inheritance, by the introduction of the system of landed property"(Agrarian Justice, 1795). It was an issue for debate among left wing parties for many decades. In his book Where Do We Go From Here: Chaos or Community? (1967) Martin Luther King wrote: "I am now convinced that the simplest approach will prove to be the most effective — the solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income". In 1968, James Tobin, Paul Samuelson and John Kenneth Galbraith and another 1,200 economists signed a document calling for the US Congress to introduce in that year a system of income guarantees and supplements. In the US, a commission nominated by President Johnson published in 1969 a report which recommended to substitute all anti-poverty measures with a special program to provide to all American citizens an annual guaranteed income. It was not unconditional, as the income was dependent on economic needs. But the bill on a guaranteed income was rejected by the Senate after being approved by the Congress.

In France, there were many discussions in the 80s about the issue of a basic income on the basis of the arguments put forward by French economist and philosopher André Gorz** . He wrote:
"The connection between more and better has been broken; our needs for many products and services are already more than adequately met, and many of our as-yet- unsatisfied needs will be met not by producing more, but by producing differently, producing other things, or even producing less. This is especially true as regards our needs for air, water, space, silence, beauty, time and human contact...
"From the point where it takes only 1,000 hours per year or 20,000 to 30,000 hours per lifetime to create an amount of wealth equal to or greater than the amount we create at the present time in 1,600 hours per year or 40,000 to 50,000 hours in a working life, we must all be able to obtain a real income equal to or higher than our current salaries in exchange for a greatly reduced quantity of work...
"Neither is it true any longer that the more each individual works, the better off everyone will be. The present crisis has stimulated technological change of an unprecedented scale and speed: `the micro-chip revolution'. The object and indeed the effect of this revolution has been to make rapidly increasing savings in labour, in the industrial, administrative and service sectors. Increasing production is secured in these sectors by decreasing amounts of labour. As a result, the social process of production no longer needs everyone to work in it on a full-time basis. The work ethic ceases to be viable in such a situation and workbased society is thrown into crisis..."
In the 90s, many studies from different countries and institutions (notably ILO) have found common ground for the idea of basic income. The Basic Income Earth Network (BIEN) has argued that one of the benefits of a basic income is that it has a lower overall cost than that of the current social welfare benefits. Research based on local cases show that a basic income does not lead to the formation of an idle class nor companies offered lower wages. Simulations suggest that the budgetary cost could be sustainable in view of the fact that it would replace existing social schemes (unemployment benefits, early retirement schemes, etc.) that are often inefficient and costly.

In fact, there are different models of basic income support. Pro-free market economists Friedrick Von Hayek and later Milton Friedman worked on the idea of creating a minimum income for all citizens to become “public services buyers”. All services would come from this income. From a practical point of view, this proposal would be relatively easy to implement, but in practice, it would lead to the necessity of redirecting all government resources receipts to a single and universal provider. In possession of these resources, the citizen would decide which type of education, healthcare or food he would utilize; he would analyze costs and make the best choice. The idea of universal income derives in their view from the assumption that the State is inefficient at distributing resources efficiently, leading to wastefulness and deviations.

But this view must be challenged on the grounds of equity, not only efficiency. The basic income should not be seen as a means to dismantle the Welfare State. In times of crisis, such form of income support becomes essential to ensure economic security and avoid social chaos. Of course, this will not happen overnight; we still need feasibility studies, experimentation at local level, impact assessments and political discussions. In Germany, the left wing party, Die Linke has promoted the idea of an unconditional basic income at the level of a federal work community and it is gaining support from many NGOs, including from Austria and Switzerland.

European left parties - or what remains - should make similar proposals to their own electorate- as an alternative to proposed tax cuts by right wing parties- not for mere electoral reasons, but because mass unemployment is putting our democracies in danger.

* See the paper of Ph. Von Parijs from Catholic University of Louvain (UCL)
** A.Gorz, Critique de la Raison Economique Eds Galilée 1969

Friday, December 25, 2009

Healthcare reform: a victory for democracy

The Senate voted Thursday 24 December the bill to overhaul the US health care system and to guarantee access to health insurance for tens of millions of Americans. If the bill becomes law, it would be a milestone in the history of US social policy, comparable to the creation of Social Security in 1935 and Medicare in 1965. It is a historic achievement - after several attempts by Roosevelt, Kennedy and Clinton- putting an end to an iniquitous system where healthcare is mostly controlled by private insurance companies which provide coverage only to the healthy and those which can afford the high costs of the premium. The significance of the reform is that health is not a market good but a right, something which cannot be left to market forces for people most in need. Incidentally, the USA has one of the lowest life expectancy index among the wealthiest capitalist economies.

The reform should cover 95% of the population giving access to health insurance through public subsidies. The Congressional Budget office estimates that the bill would provide coverage to 31 million uninsured people, but still leave 23 million uninsured in 2019. One-third of those remaining uninsured would be illegal immigrants.

It is not meant to be a national health system like in most European countries. The funding mechanism is, however, complicated and expensive. The bill would require most Americans to have health insurance, would add 15 million people to the Medicaid and would subsidize private coverage for low- and middle-income people, at a cost to the government of $871 billion over 10 years.

The strong opposition of the republicans and right wing ideologists show how this reform is far reaching and limits the power of the health insurance companies. It is a victory for democracy and human rights.

Monday, December 21, 2009

Copenhagen is just the start of a process

Most analysts and press coverage talked about the failure about negotiations on climate change. Yet, the outcome of the Copenhagen summit was largely foreseen. It is true that too high expectations were placed on the talks. So what went wrong?

Climate change is too big an issue to be resolved at once. It is thus difficult to judge on the sole fact that the agreements were not binding- the Kyoto protocol was legally binding but had essentially no effect on the global emissions. We can also mention the (morally justified) protests of the third world countries. So let's be realistic.

This is an issue of balance of power in which the actions of 20 nations really matter. This is the first time in history that all leading economies had come together to take action on global warming. In its final declaration*, the Copenhagen summit did not reach an agreement on quantified targets on global emissions by 2020. However, it registered a number of key advances. The US administration (unlike the previous one) is now committed to curb gas emissions. There is some financing from rich to poor countries to help combat the consequences of global warming. Nations have also agreed on a deal on deforestation, which is a major source of carbon emissions.

The big developing nations - which will be responsible for future growth of gas emissions- have come close to acknowledge that there will be no solution without a contribution from them. We are not there yet- and there will no doubt be more fractious negotiations to come. The whole issue is about what model of development all nations want to pursue. China, India or Brazil cannot simply continue in their development path in a business as usual scenario- which is in fact not simply an imitation of the development model experienced by the most developed nations. We're also talking about meeting basic needs of the population such clean water, electricity (especially in rural areas) and other public utilities.

The time has also come to change direction. The major producers of carbon emissions - above all China and the US- should agree on introducing a carbon tax. This proposal has been dismissed as being politically impossible, but this seems to be the only way forward. China and India will never agree on binding quotas. That is fair as nobody can predict how much fossil fuel the rapidly growing economies will need by 2020. These economies should instead not grow on a business-as-usual path, but pursue their economic development while decreasing their carbon emissions.

Another key lesson from the summit is also the role of the UN. There has been a lot of criticism on its ability to solve the world's most pressing problems. Should key nations negotiate among themselves, and let others endorse (or not) as they wish? This would in my view be morally irresponsible: all countries should be part of the deal as problems should be addressed equitably. This is perhaps more difficult, as countries must, according to UN rules, reach a consensus before a binding decision is made. For a climate change agreement covering many complex areas, hundreds of negotiators had to meet in dozens of working groups to work on draft technical documents. But in the long run, the UN method will pay off and will prove its effectiveness in forging a treaty on climate change. This will depend on common will which should prevail against narrow and selfish interests of the single nations.


Wednesday, November 25, 2009

The Food Drama is far from being over

During the world summit on food security (16-18 November), there are alarming news coming not only from underdeveloped countries with more than a billion people suffering hunger but also from the wealthiest nation. According to the US Agriculture department, around 49 million, say 14% of US families, do not have access to sufficient food and a further 11% has bad nutrition. The economic crisis has worsen the situation especially for large families : in 2007, 12 million children lived in families without any food, now the figure is 18%; more children are also in a serious state of malnutrition, rising from 700thousand to a million. these figures tell the human drama behind the recession which is far from being over.

What happened in this summit ? As Shakespeare said, much ado about nothing . The only strong message came from the Pope Benedict XVI, in his address to the summit: "Hunger is the most cruel and concrete sign of poverty. Opulence and waste are no longer acceptable when the tragedy of hunger is assuming ever greater proportions (...) the Catholic Church will always be concerned for efforts to defeat hunger; the Church is committed to support, by word and deed, the action taken in solidarity – planned, responsible and regulated – to which all members of the international community are called to contribute”. Moreover he lamented the weakness of current food security mechanisms, and urged better market access for poor countries.

The Summit formulated the objective of achieving food security for all through an ongoing effort to eradicate hunger in all countries, with an immediate view to reducing by half the number of
undernourished people by 2015. But once again, rich States did not show any concrete gesture to alleviate hunger in the most in-need countries. The final resolution sets a number of commitments, but no additional money. Where are the promises made at the G-8 in L'Aquila?

Concretely, the main message is the central role of agriculture in fighting climate change and ensuring food security. Agricultural production has to increase but at the same time the impact n the environment has to be mitigated. Specialists recommended governments to use bioenergy as a positive force for rural development. There are opportunities and risks for the environment and food security which need to be taken into account.

But, let's be clear, it is not about technology. The Brazilian experience has been successful, despite many difficulties, in achieving ahead of schedule the Millennium Development Goal to halve poverty and hunger by 2015, including through political will and social programmes for smallholder farms and women. So why not follow this example?

Saturday, November 21, 2009

Is Free Market Ethical?

I read recently an article from Philip Booth ('Ethics alone will not prevent financial crises' in FT 15 Nov.) from the Institute of Economic affairs*, a British right wing think tank which supports the revival of free market ideas on 'ethical' grounds. Basically, he argues that free market as such is not against catholic social teaching as laid down in recent encyclicals of the Church. But his main argument is also to fight against the idea that the crisis has deep ethical causes such as bribery, greed and other immoral sentiments.

He writes: "governments and regulators have distorted incentives and, as a result, the self-interest of bankers has not been in harmony with the interests of society and disaster has followed". In other words, if the economy was ruled solely by free market ideas, the crisis would have never happened. This is an 'immoral' argument which owes more to Hayek and Friedman than to the Church social doctrine.

I agree that the crisis does not have as such an ethical root, although it is clear that immoral behaviour has contributed to aggravate the crisis leading to the financial meltdown in 2007. Speculative bubbles are the fruit of greed and lust for money, not the result of rational economic behaviour.

However, the topic raises more profound philosophical issues which underpin the whole debate about ethics and economics. Adam Smith referred to the 'invisible hand' to describe the apparent benefits to society of individuals behaving in their own interests. He writes in his 'Theory of Moral Sentiments' (1759): "... In spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose ... be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society". In other words, Smith explains that man pursues his self interest while commanding himself based on the principles of natural law.

A. Hirschman departs from Smith's moral philosophy and develops a powerful reconstruction on the 'ideological' origins of capitalism. His main argument is that the rise of capitalism depended on the activity of merchants and bankers, which was originally considered sinful. So, what changed? How could an immoral enterprise become ethically acceptable? The answer lies in the moral justification of the interest as opposed to the passion - which by essence is unpredictable and irrational. Following his thinking, it is not an argument in defence of capitalism, but rather a cause of its birth and rise over more than two centuries. But, while acknowledging some virtues of capitalism, Hirschman also admits that interest driven behaviours might be dangerous, and therefore might need to be contained. His arguments have gained some validity in the context of the crisis as self interested economic behaviour, e.g. in the financial sector, will require more stringent and transparent rules.

When the Pope suggests that self-interest should be put in harmony with collective interest, he expresses a moral view. But, what is the dominant conception of economic virtue today? Isn't market competition extended to many segments of the economic and social sphere, including education and health?

In fact, Ethics matter as much as Economics. It is hardly impossible to draw a dividing line between the two. We must understand that Economics is a moral science which pursues the achievement of common good. But as every (honest) economist knows, it is more difficult to translate those principles into practice.

** The Passions and the Interests:Political Arguments for Capitalism before Its Triumph, Princeton University Press 1997

Sunday, November 8, 2009

Climate change, poverty: two defining challenges

Climate change and poverty are the two defining challenges of the 21st century and they must be tackled together. It means that if we fail one, we fail the other. The aim is to meet the environment's carbon constraints while creating the growth necessary to raise living standards for the poor.

It is true that climate change affects gravely the poorest in many parts of the world. Natural disasters have a devastating impact on human lives and also on means of subsistance.

There is no alternative to a low carbon economy. Current growth patterns are characterized by high prices for fossil fuels and undermined by a hostile physical environment that climate change is already creating. If risks are not addressed, the eventual consequences will be worse.

Climate change poses a profound threat to our economic future and to the economic possibilities of our grand children (to quote a famous essay by Keynes), while low carbon growth promises decades of sustainable prosperity.

The Stern report* concluded that "the benefits of strong, early action on climate change considerably outweigh the costs". It proposes that one percent of global GDP per annum is required to be invested in order to avoid the worst effects of climate change, and points out that failure to do so could risk global GDP being up to twenty percent lower than it otherwise might be.

However, there is a continuing rich-poor divide on sharing the burden of curbs on greenhouse gas emissions in a drive to avert droughts, wildfires, species extinctions and rising seas. At the G-20 on 7 November, Britain pushed to reach a $100bn deal to meet the costs of climate change by 2020 but developing nations held firm they would not accept.

The forthcoming UN summit in Copenhagen will probably not lead to an agreement on the costs of climate change. Economic interests from rich and emerging countries seem difficult to reconcile. But rich countries should also endeavor on helping the poor to adapt to climate change, sharing technology and cutting emissions from deforestation. The selfishness of the rich countries is in fact the main source of division.


Tobin Tax is back?

At the G-20 in St Andrews on 7 November, the British PM Gordon Brown has proposed a levy on financial transactions to stabilize markets and raise new resources. This is nothing else than the so-called 'Tobin tax' ( proposed by the Nobel Price for Economics James Tobin in 1972) . Since then, that proposal was discussed in several occasions, but in particular after the two important financial crises which preceded the current one: in 1992 where the European Monetary System was under threat after the massive speculative attacks against the Sterling and the lira (which lost about 30% of its value) putting the Italian economy in a quasi default situation; the Asian crisis in 1997, which had devastating consequences for some Asian economies with riots and demonstrations for hunger.

The Tobin tax consists in a minimum levy on financial transactions , for instance 0,5% (as proposed by Prof. Tobin in an interview to Der Spiegel in 2001). In global finance, gains could be infinitesimal but the high frequency of operations and the large sums involved yield gigantic profits . So even a low tax could result in cancelling a large volume of transactions, which would not be profitable, although markets would gain in stability. Furthermore, tax revenues would be significant : at 0,5% it is estimated that they would represent more than 80 billion dollars a year, which according to many would be sufficient to eradicate extreme poverty in the world.

Such tax requires a large consensus among the most powerful governments and so far it has been opposed by all financial agents- which is not surprising- and also by many economists. According to opponents, speculation may be bad ethically speaking but has an important role in financial markets operation to guarantee financial liquidity. We can still think that the risks deriving from the Tobin tax might be deliberately overstated: even George Soros, who gave rise to the currency crisis in 1992, declared that the tax would have undermined his interests, but that it could have beneficial effects for the world economy.

It is not surprising that the proposal has been endorsed by all opponents of globalization, but Prof. Tobin himself argued that his idea was intended to make the world economy work better, although he also supported the idea to use it as a remedy to fight poverty. Created in 1998, an international organisation called Attac* supports the idea of introducing such tax to promote social justice.

Hitherto Europe was divided on the tax, with on the one hand France and Germany in favor and the United Kingdom against it. Gordon Brown's declaration in support of the tax is most welcome, although he made clear that the tax revenues would go into a fund for the State to intervene in bailouts. There is thus an important nuance: it would be reinvested in the country for emergence purposes not to redistribute resources to eradicate poverty. In any event, an agreement among European states will not suffice, and would need to be endorse by G-20. In the final declaration**, there is no mention of this tax but the discussion is far from being over.

* Attac (Association for the Taxation of Financial Transactions for the Aid of Citizens ) -

Saturday, October 17, 2009

Inequality and the economic crisis

Financial crises are considered being inherent to capitalism. As J. Stiglitz* put it, the roaring 90s of boom contained the seeds of self-destruction. Deregulation, excessive risks, creative accounting and tax cuts in favour of the wealthy led to the current disaster. But there is another factor which is often neglected in the analysis of the current crisis. Rising income inequality since the beginning of the 90s not only in the US but in almost all developed countries has been an important driving force in the global financial crisis.

The wealthiest - the top ten per cent - receiving a growing share of national income, directed huge financial resources into asset markets causing asset price bubbles. The middle class - say 60%- experienced a drop in real wages- especially in the anglo-saxon world and started borrowing massively as house prices rose, which helped postpone the problem of underconsumption or excess in production capacity. But eventually the gap between rising debts and less disposable income increased dramatically.

The same mechanism operated in the US during the 30s in the build up to the Great Depression. J.K. Galbraith* writes that the GNP (total production of the economy) was nearly less than a third in 1929. The overwhelming majority of tax payers had lower disposable income, while the top 1 per cent increased their revenues and corporate profits significantly. Speculation on a large scale went on during subsequent years : rising profits went into real estate and stock markets feeding the asset bubble. In the aftermath of the great crash, the majority of workers is confronted with less income and greater uncertainty about jobs.

What should be done to tackle income inequality? Huge fiscal stimulus programs were launched in the US, Japan, China and most European countries to sustain global demand. But the key to reduce inequality is to combine measures to sustain employment with income redistribution through the State. But other policy areas need careful attention. They include inter alia reforms of corporate governance as well as capping to bonuses for traders in order to put limits on maximising shareholder returns at the expense of wages.

More fundamentally, a new balance between capital and labour needs to be restored. Governments should act as a matter of urgency to tackle widening inequality as rightly pointed out by Matthew Slaughter (FT October 7). The steps taken by the Obama administration, particular on healthcare and taxation go in that direction but what about the European countries where only temporary measures are taken to prevent social explosion with unprecedent rise in unemployment?

¨* J.E.Stiglitz, The Roaring Nineties, Norton , New York, 2003
** J.K.Galbraith, The Great Crash 1929, published for the first time in US in 1954. This classic book is an illuminating essay on the causes of the Great Depression.

Wednesday, October 7, 2009

Misconceptions about the crisis

We must be worried that the crisis has not been fully understood despite all the energy put into it. GDP growth is turning positive, stock market prices rise again, banks make profits. Governments start preparing exit strategies hoping to turn back to normality.

In fact, the notion of 'exit strategy' does have a different meaning: it just refers to the state of economic affairs, not redesigning the global economic system. The accumulation of public debt and liquidity are creating fears of rising inflation. But this situation has been caused by the disfunctioning of markets. In a world without memory of the past, we tend to create a confusion between causes and effects.

Should we then take seriously this pledge for a return to normality? The danger is that economic agents ( for instance banks) continue to act as if nothing happened and then the actual conditions of the crisis will be reproduced. In effect, the origin of the crisis is not associated with public debt nor inflation; it is primarily a financial crisis, which reflects a huge disfunctioning of financial markets. Consequently, it is only partially attributable to myopic markets and predatory behaviour of financial agents. The bust of the financial system, has indeed, more profound causes.

In rich countries, the last quarter of century has in most cases been unfavourable to the working class. Inequality has risen everywhere; and it is not a coincidence that the crisis bursts at the heart of the capitalist system, in the United States where the increase of income inequality has been higher than elsewhere. The other countries have followed a similar path, but to a lesser extent due to social resistence. The consequence is that global demand weakens, due to the fact that most individuals with less purchasing power spend their whole income in consumption whilst a small minority will spend a lower fraction of their income. In that context, monetary policy is used to expand global demand: lower interest rates lead to wider access to credit and therefore an increase in private debt. The other side of the coin is that a tiny minority of individuals (probably less than 1% of the population) benefit from a susbtantial increase of their incomes and seek further opportunities for investing in financial markets. The result is the formation of asset bubbles through huge increases of asset prices. The system appears (although temporarily) to be in equilibrium since private debt corresponds more or less to the value of assets. Hence the impression that the net wealth of households has increased in value. However, when the market turned to a more realistic valuation of assets, then the system collapsed because debts could not be paid off.

Then comes the implacable mechanism of the crisis : the increase in inequality leads inevitably to a loose monetary policy, which in turns increases the systemic risks in unregulated financial markets as asset prices are set to increase continuously.

This is only part of the explanation of the current crisis. There are probably other causes which need to be taken into account, such as the accumulation of reserves (in dollars) by the emerging countries to protect themselves against macroeocnomic instability and which have further aggravated the crisis of demand.

The return to growth in GDP in most countries is certainly a good thing: it means essentially that the drop in global demand has been offset by the fiscal stimulus measures implemented through the States. However, world GDP is today at least 4-5 percentage points lower than its level before the crisis. Several years of continuous growth will be necessary to return to that level. In the meantime, unemployment - which is a key indicator of the 'end' of the crisis- will continue to grow.

In these circumstances, an 'exit strategy' might allow to turn back to economic conditions which prevailed before the crisis, but will not address the fundamental causes which led to the collapse of the capitalist system. The exacerbation of economic inequalities is not accidental, but it is the poisoned fruit of a particular conception of ' economic virtue' which puts at the heart of the model of society fiscal and social competition as the engine of growth.

The economic crisis is not a natural disaster, although many journalists and economic analysts present the financial turmoil as a 'tsunami'. All natural events occur in a limited timespan and cause damage and pain mainly to the weak categories of the population. It has to be seen on the contrary as a sign of profound disfunctioning of the capitalist system. Unorthodox economists, from Marx to Keynes and most post-keynesians like Harrod, Kalecki and Minsky have shown that this system is structurally unstable.

In his 'Theory of business cycles' (1939), Schumpeter wrote :"Cycles are not like tonsils, separable things that might be treated by themselves, but are like the beat of the heart, of the essence of the organism that display them".

We will not get out from the crisis if we fail to understand its underlying causes and if accordingly the right economic policies are not put in place in a coordinated way among States to tackle them.

Monday, September 28, 2009

G-20: a global economic government?

Just one year after the financial crisis which started in the US the G-20 gathered in Washington, London and now in Pittsburgh, leaders from both rich countries and emerging powers which represent about 85% of the world output and almost two thirds of the world population. It was created in September 1999 after the financial crises of the nineties, but it was nothing more than a forum for dialogue among finance ministers and central bank governors of 19 nations and the European Union. Since the G-20 in Washington (Nov.08), the meeting is held at the level of Heads of State twice a year. We can ask whether it will now be more effective because it includes important new players like China, India and Brazil, or whether it will simply be more unwieldy.

Leaders agreed on a far reaching effort to revamp the world economic system*. The agreements, if carried out by national governments, would lead to much tighter regulation over financial institutions, complex financial instruments and bonuses. They could also lead to greater coordination and more external scrutiny over the economic strategies of individual countries, including the United States.

Most economists agree that the imbalances caused by the huge US trade deficit and related surpluses in China, Germany, Japan and oil exporters, contributed to the global financial and economic crisis. In fact, world growth was underpinned by surplus dollars from China and oil exporters recycled back to US consumers by the financial system. But that mechanism collapsed in 2007 as defaults from subprime borrowers surged and the financial system was severely affected with bailouts of banks and insurance companies in many countries.

In order to achieve a more balanced growth, the United States will be expected to increase its savings rate, reduce its trade deficit and address its huge budget deficit. Countries like China, Japan and Germany will be expected to reduce their dependence on exports by promoting more consumer spending and investment at home.

Whilst there is agreement on the need for harmonization of economic policies to avoid global imbalances, the leaders pledged not to withdraw stimulus measures until a durable recovery is in place. They agreed to co-ordinate their exit strategies, while also acknowledging that timing will vary from country to country depending on the forcefulness of measures in place. However, there will be no enforcement mechanism along the lines of the European stability and growth pact to limit budget deficits. For the first time ever, each country agreed to submit its policies to a “peer review” from the other governments as well as to monitoring by the IMF.

Nobody can doubt that the Obama administration is taking the reform agenda forward but it will face resistance from European nations which pursue national interests above all. The German government is determined to resist any firm commitment that would reduce its current account surplus and would not cede sovereignty on core economic decisions.

Another set of decisions concerns the governance structures, in particular the rebalancing of the IMF with developing countries at least 5% more of the voting rights by 2011 and the enhanced role of the Financial Stability Board (FSB) for early warning on emerging risks. Taken together the IMF overhaul with the expanded powers of the G-20 mark an important step in global governance.
Too much or too little? Some countries expected to go further, for example in capping trading bonuses , reforming global institutions or imposing sanctions to countries for not respecting their commitments.
What is at stake is the future of capitalism. The big question is whether G-20 would bring radical reforms to ensure a safer and more equal world or just save it from future crises. For the time being, it looks like an embryonic world economic government.


Monday, September 21, 2009

Zero Hunger depends on social choice

In 1976, a political scientist and activist, Susan George wrote a stimulating book* to explain the real reasons of world hunger. She destroys two popular misconceptions; firstly that there is not enough food and secondly that the world is over-populated. She demonstrates clearly that the planet could easily feed its present population and many more. She also explains that the problem is not climate change, nor will food technology provide the solution. The problem is that world food supply is controlled by the rich elite and the poor have no say on the terms of trade that keep the poor hungry. Although the book was written in 1976, the fundamental injustices of the world economy remain the same and they should be addressed vigorously.

But the question is whether under the present circumstances it is possible to alleviate or even eliminate hunger? In past decades, many policies and programmes aimed to reduce or eliminate poverty and hunger but their effectiveness has been so far mixed. Much has been done to alleviate the plight of the hungry over the years by church groups, NGOs and local authorities. Several governments have introduced programs aimed in various ways at easing the living conditions of the poor. In spite of all of this, hunger and food insecurity have continued to blight the lives of many human beings, preventing them from both benefiting from and contributing to their country’s overall prosperity.

In Brazil, President Lula since his first election sought to eliminate poverty with his ambitious program 'Zero Hunger' (ZHP) launched in 2003. President Lula’s phrase, presented in a speech in his election’s day, that became famous, expresses very well this universal character of the ZHP: “The first year of my mandate will have the hunger combat mark… If, at the end of my mandate, each Brazilian could eat three times a day, I will have realized my life mission”.

The International Bill of Human Rights and many national constitutions ensure universal coverage for health and education, the right to employment and they also include the right to adequate food. However, in Brazil as in many other countries, there is no 'public food system' as it exists for public healthcare and education (although their provision is constrained due to the fiscal crisis). In third world countries where the needs of the poor are huge, the State does not have the means to care for every essential right of each person. As resources are not large enough, the policy aims to target beneficiaries which are most in need in order to ensure maximum efficiency and avoid waste of resources.

In Brazil, the ZHP is based on the notion of 'vulnerable to food insecurity'. Using an estimation of domestic income, the target population was 9.3 million households vulnerable to food insecurity in 2001, which amounts to a total of 46 million people. It is also geographically concentrated in the North-East, with almost half of the 'vulnerable' population.

But the problem is not only food; we need to break the poverty cycle: low educational levels, job insecurity, poor nourishment and health, low income. Social policies have to be put in place to create equal opportunities for all in order to reduce the gap between the rich and the poor and allow future generations to improve their economic and social situation. The Human Development Program Oportunidades (Opportunities) launched in Mexico in 1997, which embraces health, education and food areas, is based on transfer of resources to the target household being conditional on beneficiary actions such as keeping children at school and benefiting from basic healthcare for the whole family. It served 4.2 million households with transfers of about 1% GDP and results look encouraging.

The ZHP focuses on food insecurity, but is part of a wider set of programs to ensure that populations vulnerable to food insecurity can enter in a self-sustaining development process. In other words, the transfer of resources to these populations presupposes some structural actions in terms of the provision of health, education and infrastructure (sanitation, water supply) with a view to improve household incomes.

These positive experiences- ZHP as well as Progresa- show that social choice is possible if those programs are well designed and targeted to the poorest. Social mobilization becomes a necessity to create the right environment which will enhance the effects of the social programs. But they will also become effective if other countries pursue similar policies and that hunger can be fought with adequate means and instruments.

* How the Other Half Dies: The Real Reasons for World Hunger (Penguin) 1976

Friday, August 28, 2009

The Robin Hood Tax

The actual health care reform bill (House Bill 3200) reported by the Congress on July 14 - which aims to " provide affordable, quality health care for all Americans and reduce the growth in health care spending",- is vigorously opposed by conservatives as well as the insurance companies which regard the proposed publicly funded system as a threat to their profitable activities.

But there is one fundamental point which deserves attention on the revenue side. The bill introduces an additional tax of 1% on wealthiest Americans to finance health expenditure of 20% worst-off citizens. This might be seen as one of the most radical proposals ever passed through US legislation. It contrasts with Bush policies which introduced tax cuts benefiting mostly the rich Americans. Yet it might appear modest by European standards, notably in continental countries which provide a high level of social protection for all citizens.

The bill contains however the recognition of the principle of solidarity, that is, in the US society the rich should pay for healthcare of the poor who cannot afford it. This will not affect much the wide disparities in income which exist in the US. According to Robert Reich, former US Labour secretary, 1% of the wealthiest in the US has about 20% of total income, the highest level since 1928.

Critics on the conservative side argue that this measure will affect the tendency to invest and innovate and therefore future jobs. But, if a small fraction of this wealth means a better access to healthcare for a larger number of American citizens, who will get more regular checks and live longer in a better health and therefore be more productive, the positive effects on the US economy will be much greater and long lasting.

This is less an issue in Europe, although European societies are increasingly confronted with widespread poverty. Why not introduce a similar Robin Hood tax in Europe, not to finance healthcare but consumption for the poorest to meet their basic needs? This would give a signal that democracy is not only for the rich but also promotes social justice and solidarity.

Tuesday, August 25, 2009

The End of the Mezzogiorno?

Back to old happy days? The Italian government has decided to set up a new Cassa per il Mezzogiorno, a former development Agency for the southern Italian regions. This initiative, strongly supported by the Finance Minister, Giulio Tremonti aims to take back control on expenditure due to the inefficiency of the regions to manage EU funds.

The Casmez was created in 1950 with an initial allocation of a billion lire for a period of ten years, with 66% of the funds earmarked for major rehabilitation of contaminated sites and 20% for roads and sewage networks.

Between 1951 and 1992, the equivalent of 140 billion euro was granted to projects for the Mezzogiorno. Svimez, an Italian research institute for the Mezzogiorno, argues, however, that, between 1950 and 1989, transfers represented in real terms (in purchasing power standard of 1989 prices) about 2.5 billion on annual average, the equivalent of 0,7% of gross National Income. This is less than what the State transfers each year to pay for the deficit of the national railway company. But this expenditure is off budget, in other words it is additional to the normal transfers made by the State to all Italian regions.

The old Cassa was abolished in 1993 by the Italian Budget Minister, Beniamino Andreatta, due to serious budget problems. It left however a huge backlog of unfinished projects which absorbed a few billions of euros. In reaction to the crisis of the development policies for the Mezzogiorno, a new regional policy was set up in 1998 and led by Carlo Azeglio Ciampi, a former Treasury minister who became President of the Republic and Fabrizio Barca, an economist at Bank of Italy. It was meant to provide a strategic direction to investments with an integrated programming framework associated with defined , measurable objectives. This new approach was supported vigorously by the European Commission albeit with some criticism on the overambitious objectives, notably on growth targets: this would have implied huge increases in efficiency of public investment which never happened.

It is evident that the Mezzogiorno has been a big failure. Despite a sustained trend of investment over more than half a century, gross domestic product in per capita terms is still 43% lower than that of the Centre-North of Italy. The ratio between cost and results is, therefore, very low.

We should ask ourselves whether this ‘revamped’ body is really useful: will it truly serve the interests of the citizens and improve their daily lives? Will it be accountable vis-à-vis the tax payers? The experience to date of the former Cassa and the other bodies which came after, such as Sviluppo Italia has shown that this has not been the case.

I am not sure we need other structures to lead development policies from the centre. The risk is that it would inevitably be captured by the same lobbies and parties which prevailed in the past. There is no reason why this should change under current circumstances. We do not have at the moment any details on how this will actually work, but I am rather incline to believe that aid will continue to be delivered as before without any clear and transparent criteria and without a sound evaluation process which will ensure the relevance and the effectiveness of the investment projects.

The main problem of the Mezzogiorno is the lack of effective institutions to enforce market rules, but more simply the Rule of Law. There cannot be any sound development process if the mafias are still prospering and control a growing part of the economy- by controlling (or influencing) institutions, such as procurement mechanisms. Young skilled people are migrating massively to the North and abroad due to the lack of opportunities.

On the other hand, we need to exploit the underused human potential which exists in the Mezzogiorno. We must rely on the ‘creative class’ of the (few) entrepreneurs, craftsmen, men of art who can bring innovation and creativity. This is our hope to restart a ‘virtuous circle’ but there are still too many blockages from a system of power which is not subject to any effective control mechanisms. Democratic accountability which means true responsibility seems to belong to another planet.

It comes to my mind the words of A.Gramsci in 'La Questione Meridionale' (1921): 'The Mezzogiorno does not need special laws or any special treatment. It needs a general policy, external and internal, which is inspired by respect of the general needs of the country, and not by particular political or regional tendencies' "*. Maybe we should think, as suggested by Gianfranco Viesti*, about abolishing the Mezzogiorno.

* G.Viesti, Abolire il Mezzogiorno, Edizioni Laterza, 2003

Tuesday, July 21, 2009

Animal spirits, irrationality and markets

The current crisis brings about a radical shift in economic thinking. There is a hot debate among economists about the reasons why they failed in predicting the crisis. In fact, there is no consensus on the analysis of the causes of the crisis nor on the ways to get out from it. Now, the dominant view among (orthodox) economists is that we are seeing the light from the tunnel.

Economists who believe in the rationality of markets would be more incline to think that the crisis is just a temporary imbalance which has led the economy far from the equilibrium. John Maynard Keynes warned against this simplistic view: “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” But all this is not about rationality, it is related to human psychology of economic behaviour.

In their book*, G. Akerlof, who shared the Nobel prize in 2001 for his work on information assymetries and R. Schiller - who predicted the dotcom and real estate bubbles - reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and desperation that led to the Great Depression and the changing psychology that accompanied recovery. Keynes's forgotten lesson is not here the theory of government spending; he asserts that the behaviour of economic agents is not inspired by a pure rational model, but is largely driven by irrational and psychological factors. Markets are not regulated by rational and imprescriptible laws; they are largely influenced by passions and interests of human beings. In other words, they can be guided by an economic policy geared to collective interest and full employment.

In past thirty years, this lesson has been forgotten. Likening the role of government to a parent's duty to create a happy home, the authors write: " The proper role of the parent is to set the limits so that the child does not overindulge her animal spirits . Likewise, they point out that 'no limits were set to the excesses of Wall street. It got wildly drunk...And now the world must face the consequences".

It is thus necessary to rethink the behaviour of economic agents whatever their motives are rational or irrational. Akerlof and Schiller examine some psychological factors which could influence economic behaviour - confidence or mistrust, bad faith, corruption, monetary illusion- and draw conclusions in terms of economic policy inspired by a 'good education'. In overlooking those factors and being confident in the 'invisible hand' of the market, (orthodox) economists made disastrous mistakes in their forecasts. They have developed sophisticated econometric models - for which some of them got the Nobel Prize- which turned out to be impractical.

The fundamental reason for which economists failed in their forecasts is because the market is largely influenced by a complex interaction of economic powers, instincts and passions. If asset prices go up, demand can also go up due to expectations on further increases leading to asset bubbles. As J.K. Galbraith wrote in his foreword to the 1993 edition of 'A Short History of Financial Euphoria', investors “might be reminded of the way not only fools but quite a lot of other people are recurrently separated from their money in a moment of speculative euphoria.” But, other 'innocent'people are separated from their money and their jobs.

In their analysis of the Great Depression, the two authors portray Keynes as a true 'liberal'- but he has inspired, nevertheless, the economic policy of many governments run by socialist parties, like the Jospin government in France. Right wing critics insist, conversely, that through balanced budgets and limited government regulation private markets would create jobs for any worker willing to get paid less than he produced. Keynes thought capitalism as productive system, but unstable and fragile, prey to the 'animal spirits' that lead to speculative mania and panic, which in turn leads to joblessness (quaintly described as 'involuntary unemployment').

In times of recession animal spirits tend to revive. The proper role of government is to temper these excesses through financial regulation- and to stimulate demand using deficit spending. In the wake of the crisis of the 30s, the Us governments showed excessive concern for balanced budgets but they still managed to impose some financial reforms and to stimulate demand. the authors point out, indeed, that fiscal policy was at that time insufficiently bold.

We have to think about the situation of the American economy in the 30s. There was a widespread feeling about the unfairness of the economy leading to labour unrest and the 'spectre of socialism (which the most conservative parts of the US society are still agitating today, for instance in the debate on healthcare reform). A key feature of animal spirits is 'money illusion': the inability to recognize that prices fell by 27 percent led Hoover, then Roosevelt to focus on raising real wages increasing purchasing power rather than stimulating demand to reduce unemployment.

As Keynes pointed out, the fundamental problem was that bankers were too reluctant to loan, because they thought they would lose their money. And some of the more 'radical' measures of the New Deal led capitalists to worry that market system would be replaced by a communist dictatorship, which further depressed their willingness to invest. Since deficit spending was not of enough scale to stimulate demand, economic pessimism tended to set in. Only with the emergency mobilization of World War II did the national economy begin to change.

Our contemporary economic problems cannot be directly compared with the situation of the 30s. However, Akerlof and Schiller end with a positive note: 'Yet we are currently not really in a crisis for capitalism. we must merely recognize that capitalism must live within certain rules". But we must take into account that irrational behaviour has a real effect on demand, necessitating government intervention.

Just a last observation on the general approach of the book. In their analysis, Akerlof and Schiller focus on individual agents, for which we can distinguish between rational and irrational motives. But our modern economies are also characterized by collective agents, firms, trade unions as well as the State. Choices made by these agents might be rational, but different from those of individual agents. The threat of being fired might lead workers to accept a reduction of their wages, but it could also determine a reaction from trade unions to defend the workers' wages, which in turn would cause cost increases for the firm and in macroeconomic terms a stimulation of demand.

From a different perspective, decisions taken on the basis of self interest might be contrary to the general interest if agents's behaviours are largely interdependent. We should rather make a distinction between public and private interests. Collective, rather than individual motives need to be evaluated every time in accordance with the general interest.

*George A. Akerlof and Robert J. Shiller, Animal spirits- How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism 230 pp. Princeton University Press. 2009

** J.K.Galbraith, A Short History of Financial Euphoria, - Foreword to 1993 Edition, Viking Press, 1994

Saturday, July 18, 2009

The Minsky moment

The Economist (17 July) asks what went wrong and how the crisis is changing economic thinking. It writes: 'Economists need to reach out from their specialised silos: macroeconomists must understand finance, and finance professors need to think harder about the context within which markets work. And everybody needs to work harder on understanding asset bubbles and what happens when they burst. For in the end economists are social scientists, trying to understand the real world. And the financial crisis has changed that world'.

The current crisis has revived the debate among rival economic theories. Monetarism is dead and keynesianism is back. An economist, H.Minsky* has gained influence over a decade or so; although educated at Chicago , Minsky was nonetheless an enemy of the "Chicago School" of economists, who typically believe in the efficiency of markets. Building on Keynes' General Theory, Minsky argued that crises were integral to financial markets.

Minsky claimed that in prosperous times, when corporate cashflow rises beyond what is needed to pay off debt, a speculative bubble develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts.

In other words, the longer economic stability lasts, the more risks borrowers will take. His model of the credit system shows that the cause of instability is the accumulation of debt. He distinguishes three types of borrowers (hedge borrowers, speculative borrowers and Ponzi borrowers). While some debtors are perfectly sound, others can only pay off their interest by renewing their loans. The third group of borrowers (that he calls Ponzi) sounds dangerously familiar: they borrow based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments.

The 'Minsky moment' - a term coined by an American economist, Paul McCulley** is the point in a credit or business cycle when investors have cash flow problems due to spiraling debt they have incurred in order to finance speculative investments. At this point, a major selloff begins due to the fact that no counterparty can be found to bid at the high asking prices previously quoted, leading to a sudden collapse in asset prices and a sharp drop in financial liquidity.

Minsky's financial instability hypothesis has received revived attention during the 2008 subprime crisis due to the debt accumulation problem. McCulley illustrated the three types of borrowing categories using an analogy from the mortgage market: a hedge borrower would have a traditional mortgage loan and is paying back both the principal and interest; the speculative borrower would have an interest-only loan, meaning they are paying back only the interest and must refinance later to pay back the principal; and the Ponzi borrower would have a negative amortization loan, meaning the payments do not cover the interest amount and the principal is actually increasing. Lenders only provided funds to Ponzi borrowers due to a belief that housing values would continue to increase.

McCulley writes that the forward progression through Minsky's borrowing stages was evident as the credit and housing bubbles built through approximately August 2007. Demand for housing was both a cause and effect of the rapidly-expanding shadow banking system, which helped fund the shift to more lending of the speculative and Ponzi types, through ever-riskier mortgage loans at higher levels of leverage. This helped drive the housing bubble, as the availability of credit encouraged higher housing prices. Since the bubble burst, we are seeing the progression in reverse, as businesses de-leverage, lending standards are raised and the share of borrowers in the three stages model shifts back towards the hedge borrower.

As Henry Kaufman, a Wall street economist and banker writes in the foreword of Minsky's book: 'now it is time to take seriously the insights of Hyman Minsky and build upon his groundbreaking work in order to find ways of putting our financial system on a more solid footing'. This sounds as a serious warning, but this means putting an end to the greed and cupidity of bankers. We badly need ethical rules and regulation to bring radical changes in the financial system.

* Hyman P. Minsky, Stabilizing an Unstable Economy, 2nd edition, Foreword by Henry Kaufman- McGraw Hill 2008

Friday, July 10, 2009

G-8 in L'Aquila: success or failure?

The recent G-8 summit in L'Aquila, a small Italian town devastated by an earthquake, has raised many expectations. The agenda was ambitious, with three specific issues - climate change, aid to poor countries, mainly Africa and Iran- and a more general topic on the global economic crisis and the diagnosis on various policy responses.

On the economic crisis, diverging views exist between the US president - whose diagnosis is that the situation will get worse as the unemployment rate rose to 10% - and the other leaders (at the other extreme, the Italian PM considered that the worst is over and that the employment situation is not that dramatic!). In a recent interview (FT 1O July) , Larry Summers, former Treasury secretary and chief economist of the Obama administration said: “I don’t think the worst is over ... It’s very likely that more jobs will be lost. It would not be surprising if GDP has not yet reached its low. What does appear to be true is that the sense of panic in the markets and freefall in the economy has subsided and one does not have the sense of a situation as out of control as a few months ago.” If there is no consensus on the diagnosis and the causes of the crisis, it will be difficult to find common solutions.

Most newspapers and analysts have given ample information and commentary on the main outcomes of the G-8 meeting. On Iran, there was unanimity (including Russia) to condemn violence and repression as well as the negation of holocaust. On climate change, all countries accepted the principle of 2° C temperature increase as a limit, but emerging countries did not agree to cut their gas emissions. This will be a central topic for discussion at the Copenhagen summit, but the novelty is the US commitment to make significant cuts in gas emissions and to focus on renewable energy as a basis for their economic recovery programme.

On the aid issue, - perhaps the only succesful outcome of the meeting- world leaders pledged to commit $20bn over three years for a “food security initiative” to develop agriculture in poor countries, but aid agencies responded with scepticism, pointing to broken promises and switch in aid budgets. The G8 pledge at Gleneagles four years ago to give $50bn in development aid by 2010, with half going to Africa, has left a gap of at least $15bn so far. The summit statement addressed the scepticism, declaring: “Commitments to increase overseas development aid must be fulfilled. The tendency of decreasing ODA and national financing to agriculture must be reversed.”

Last but not least: the governance rules. The Italian Finance Minister has submitted, with the support of OECD experts and the German government, a 13 p document titled Global Legal Standards, which sets out a set of principles and ethical values- e.g. transparency, fight against corruption and tax fraud, fight against monopolies- on which, of course, there was unanimous consensus. But the rules still need to be defined and agreed by all countries before they can be enforced to banks and other financial institutions.

Since its inception by Giscard D'Estaing in the Rambouillet summit in 1975, the G-8 has been a forum of discussion and exchange of views on world affairs among the leading nations. It is not meant to take decisions as no country has transferred any part of sovereignty to it. After l'Aquila- which was in fact a G-14 summit- , it will be the G-20 in Pittsburgh to take over as a governance structure including China, India, Brazil and other emerging countries.

As Shakespeare's Portia says in The Merchant of Venice, ' If to do were as easy as to know what were good to do, chapels had been churches, and poor men's cottages princes' palaces'. It might be easier to set objectives, but more difficult to deliver them - in other words we need to establish the right institutions and start the processes that will achieve these objectives.

Thursday, July 2, 2009

On Efficiency, Justice, Liberty

Keynes* wrote in 1926: 'the political problem of mankind is to combine three things: Economic Efficiency, Social Justice and Individual Liberty. The first needs criticism, precaution and technical knowledge; the second, an unselfish and enthousiastic spirit which loves the ordinary man; the third, tolerance, breadth, appreciation of the excellencies of variety and independence, which prefers to give unhindered opportunities to the exceptional and to the aspiring..."

Today we need to bring the institutions that foster this triad of efficiency, justice and liberty up to date.

Given the increase in productive capacity in the past fifty years, we can compromise on the goal of economic efficiency. We - in Europe- are rich. This means we can afford to sacrify some output to achieve social justice and individual liberty. This objective is well served by an economic order, involving State interventions that affect effectively the results of decentralized market processes. Huge centers of private power and inequalities in income compromise the goals of efficiency, justice and liberty. A policy that is willing to forgo the advantages of giant corporations and vast financial organisations seems highly desirable. In the light of recent experience, where the difficulties encountered by these large centers of economic power are central to the instability that affects the economy, they should, in the interest of efficiency and stability, be reduced to more manageable dimensions.

Social justice rests on individual dignity and independence from both private and political powers. Dignity and independence are best served by an economic order in which income is received either by right or through a fair remuneration. Dependance on expanding systems of transfer payments that have not been earned is alienating to the recipient and destructive of the social fabric. Social justice and individual liberty demand interventions to create an economy of opportunity in which everyone, except certain categories of the population, e.g. the handicapped, earns his or her life through the exchange of income for work. Full employment is a social as well as an economic goal.

It would be naive to think that all stated social and economic goals are mutually consistent. Emphasis on one objective may decrease the ability to achieve other goals, so priorities must be set. However, we should favour as an overriding goal personal freedom and democratic rights which serve the promotion of social justice.

In times of crisis, economic policy must reflect a vision inspired by the ideals of a good society. And it is evident that we are faced with a failure of vision, with a crisis in the aims and the objectives that economic policy should serve.

* Essays in persuasion" Norton& Company 1963. The essay was titled 'Liberalism and Labour' (1926)

Wednesday, July 1, 2009

A wisdom for a new age

Just before the G-8 meeting in L'Aquila, Pope Benedict XVI warned that there will not be any way out of the crisis without 'measures of ethical value', i.e. jobs and solidarity. In his encyclical 'Caritas in Veritate'*, he condemns the 'grave deviations and failures' of capitalism exposed by the financial crisis and advocates for a return to ethics in the management of the global economy.
The encyclical follows essentially the message of Paul VI's 'Popolorum progressio' (1967) which was largely influenced by the humanistic ideas of Father Lebret, J.Maritain and F.Perroux. Paul VI had an articulated vision of development. It could not be merely reduced to the increase in production of goods and services, but had a more fundamental meaning. The concept of development is broadly understood as the satisfaction of basic needs for people and indicates the goal of rescuing peoples, first and foremost from hunger and deprivation, endemic diseases and illiteracy.
The new encyclical brings the doctrine of 'integral human development' up to date . It calls, for a profound change in the foundations of capitalism, particularly in the relations between market, enterprise and State . It highlights the importance of distributive justice and social justice for the market economy: 'without internal forms of solidarity and mutual trust, the market cannot completely fulfil its proper economic function' (§35). It reaffirms the social responsibility of the corporate world: 'Today's international economic scene, marked by grave deviations and failures, requires a profoundly new way of understanding human enterprise...Without doubt, one of the greatest risks for business is that they are almost exclusively answerable to their investors, thereby limited in their social value' (§40). It places emphasis on the need for 'just laws' and 'forms of redistribution' of wealth as well as other forms of economic activity based on gratuitousness.
The 127 pages document is quite dense and addresses a range of many other important issues, including migration, terrorism, bioethics and energy.
The main 'political' message is, however, the call for a 'true world political authority' to 'manage the global economy, to revive the economies hit by the crisis, to avoid any deterioration of the present crisis and the greater imbalances that would result'. This idea is not likely to be endorsed by the Group of Eight summit nor to influence decisions on international governance at the next G-20 summit. But his plea for financiers to refocus on ethics will be reflected in the final declaration calling for stronger and more coordinated 'global standards'.

As Keynes put it emphatically, we need to 'invent a wisdom for a new age'. In this regard, the Church's document is an important step forward in the direction of a profoundly reformed system.

Tuesday, June 23, 2009

Europe must change after the crisis

Yesterday, in his speech at Versailles, once a symbol of the monarchy, N.Sarkozy said "The crisis is not over. We don't know when it will end...."Thinking of the crisis as brackets that will soon be closed ... would be a fatal mistake. Nothing will be the same ever again. A crisis of this magnitude always calls for profound questioning. We cannot witness such a catastrophe without questioning the ideas, the values, the decisions that led to such a result". He went on saying: "Europe must change too. It will not be able to function after the crisis as it did before ... Europe must give itself the means to participate in the transformation of the world".

Nothing will be the same anymore. G.Bush said also that after 9.11 and his father after the Gulf war when he spoke about a new world order. I think Sarkozy is perfectly right, but some statements are too general. What does this mean concretely, in particular for Europe? I could not find one concrete proposal, apart from a borrowing initiative which reminds what many French finance ministers did in the past, from Pinay to Balladur.

Conversely, the former Belgian PM Verhofstadt* made a series of concrete proposals in his recent book. Europe is part of the solution, not the problem. Instead, it is not with a mere collection of 27 stimulus plans that we will find the way out of the crisis. The European Commission can steer this process through a set of coordinated actions and achieve better complementarity and synergies between member States policies as well as with EU policies in some key areas such as regional development, research and climate change.

We need to work all together for the common good, which means that it is in the interest of everyone to find ways to get out from the mess. But will is not enough, we should have the right ambition and the necessary means to achieve that.

*Sortir de crise : Comment l'Europe peut sauver le monde, Actes Sud/André Versaille Éditeur, coll. « Essais Sciences humaines », Arles/Bruxelles, 2009, 252 p.

Saturday, June 20, 2009

The danger of unemployment

Rising mass unemployment in Europe is putting social cohesion at risk. Every single unemployed is a threat to democracy. Just look at the low turnout figures of the recent elections for the European Parliament. It is not because the issue was Europe. There was hardly any debate about Europe in the campaigns, not only in Britain. This was rather a test for national governments: the rejection of traditional parties has been quite massive.

The Economist (20 June) writes: 'So far this recession has not been all bad for Europe. Above all, the past few months have looked good for the European concept of 'flexicurity'... Europeans will tolerate more flexible markets so long they have the security of generous social assistance of things go wrong".

It is true that most European governments have undertaken labour market reforms. They have asked their citizens to accept more flexible labour laws and wages. But were they really effective in securing more jobs? Spain was considered as a success but the only result was to produce a generation of young, precarious workers (called 'mileuristas', those who earn about a thousand euros) who cannot make plans for the future due to the uncertainty on the renewal of their temporary contracts. The country has now an unemployment rate close to 20% and the social assistance received by the unemployed is rather limited.

The issue is that inequalities in labour market access create a divide in our societies and render them vulnerable to any form of extremism. European governments are aware of the danger as shows the recent speech of N. Sarkozy at the ILO in Geneva. So what to do with the many millions of workers who will lose their jobs?

The response is far from being easy. One way is to encourage early retirement schemes which have a lower cost (also political) than mass lay-offs- and this will not be reflected in the rise of unemployment. Another more cautious solution (in fact preferred by most governments as being more socially acceptable) is to raise the retirement age to 67 to safeguard the pension systems. But this will not guarantee the economic future of Europe. Human capital is not fully valued - many young skilled workers accept unskilled jobs on temporary contracts or leave their own origin country.

Most politicians are scared by mass unemployment as they understand the moral and social consequences. But this does not mean that they will develop a vision for the future. We need a real debate on employment and education, as they are intrisincally related and also because they are the key to cohesiveness.

Thursday, June 18, 2009

Global governance: a new economic order?

Global governance is the key word today. In most people minds, it is ascertained that governance is not government. It is not the ideal of the 'world government' praised by St Simon, that is being revived. In his book on 'Global governance' (1995), Desai tries to clarify what this could mean: 'It is the provision of the Rule of Law, a symmetric framework in which the weak as well as the strong are subject to the same rules". Can we at the present juncture envisage the possibility of even a minimal framework?

The Bretton woods system had worked at least for two consecutive decades in the post war period until its disruption when the gold standard was replaced by the dollar. But when it failed, it was not immediately obvious what would replace it. The floating exchange rates prevailed, particularly for major currencies, dollar, yen and D-mark. Then came a long period of low inflation and steady growth because of the growth of India and China which created a supply shock to put dowward pressure on prices. Deflationary tensions were avoided temporarily by a loose monetary policy that encouraged asset bubbles which eventually led to the current financial crisis.

Some Western governments (in particular britain and the US) have huge trade as well as budget deficits and will have to pay a price in terms of higher taxes to meet the interest of the debt and the claims of foreign creditors. The Economist (14 May) writes: 'Creditor nations tend to set the rules and the new global monetary system will be unable to operate without the approval of China, a creditor country that controls and a managed currency. It has been assumed that China will have to move towards the western model. But why not the other way round?

It is perhaps premature to say that a new global order is coming into existence, but this will not happen without China, and possibly India, Russia and Brazil, which are trying to increase their influence over the so-called 'Western world'. The significance of this major shift in the balance of power is that there has been a process of correction in which the powerful nations are not anymore in a position to set the rules for the rest of the world.

Our hope is that these corrective forces - with the rise of globalisation and new economic powers- will contribute (paradoxally) to establish a more democratic international order. Along with this, we need stronger international institutions to set new economic rules to promote well being, high employment and sustainable growth. But also a new political framework, including rules to enforce respect of human rights, especially for citizens from weaker states (asylum, refugees, migrations,..). It's all about the future of mankind, not only the interests of the strong.

Sunday, June 14, 2009

Why Religion matters

After decades of secularism, the world has seen a surge of spirituality. The current surge is different, however, because it has assumed a global context. Spirituality is the living heart of all the great world religions. It is not a mere return to biblical and historical roots.

Some argue that religion is the cause of our worst divisions, and a threat to democracy and civilization. The truth is more broadly and deeply rooted in the human psyche and spirit. The great religious traditions have survived across millennia because they express insights that human beings have repeatedly found to be true. But they are containers for those insights—fashioned and carried forward by human beings, and therefore prone to every passion and fragility of the human condition. Religions become entangled with human identity, and there is nothing more intimate and volatile than that. Our sacred traditions should help us live more thoughtfully, generously, and hopefully with the tensions of our age. But to grasp that, we must look at the very nature of faith.

Huston Smith*, one of the most respected authorities on religion provides a reflection on the urgent need to restore the role of religion as the primary humanizing force for individuals and society. Bringing together insights from comparative religions, theology, philosophy, science, and history, along with examples drawn from current events and his own personal experience, Smith gives both a convincing historical and social critique and a profound expression of hope for the spiritual condition of humanity.

It is true that religious leaders seek to increase their influence over the course of action on the grounds of morality and ethics. How can religion and faith make a contribution to resolve our current problems?

All religions contain an idea of what is common good and offer some guiding principles to achieve it. In fact, the influence of religion in economic life is far from being irrelevant. In western societies, the catholic church has contributed in many ways to reducing the influence of the market and has shaped a third sector made of voluntary organizations, charities and so on. It provides a social safety net for many disadvantaged people, e.g. immigrants that regular social systems cannot assist directly. Islamic faith has also shaped many aspects of economic life, for instance with the zakat , which is a form of charity as every muslim has to give a small share of its wealth to the poor. Judaism is also based on righteousness and social justice.

All men, whether they believe in their faith have to live according to their moral and ethical principles. Develop a consciousness - Above all human rights are sacred and social justice - which is linked to common good- should prevail over the search for profit.

But we also need a dialogue and mutual understanding between the great religions. This dialogue should be revived with various initiatives led by courageous organizations like Sant'Egidio, despite of continuous tensions and misunderstandings, often the product of ignorance.

*Why Religion Matters: The Fate of the Human Spirit in an Age of Disbelief- paperback- January 2002

Friday, June 12, 2009

The economic crisis and the ethics of capitalism

In recent times, Ethics has become a new paradigm which extends from trade to finance and business. Yet capitalism is in troubled waters; 'love of money' has led to extreme situations: high wages for the rich, huge financial profits, intollerable poverty, extreme inequality in income, environmental degradation,... The resurgence of Ethics seems to be a reaction to the moral and social consequences of a world dominated by an endless search for wealth.

Keynes expressed his views in his famous essay 'Economic Possibilities for our Grandchildren'(1930): "All kinds of social customs and economic practices, affecting the distribution of wealth and economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they maybe in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last to discard". He also wrote: 'When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals".

There can't be any dissociation between Economics and Ethics - which goes back at least to Aristotle in Nichomachean Ethics, where he related economics to human ends. Adam Smith's theory, - he was a professor of Moral Philosophy at the university of Glasgow- , was wrongly assimilated to pure free market. We owe to Amartya Sen* his critique of mainstream economics on ethical grounds. The self-interest view based on rational behaviour involves a rejection of ethics and leads to very abstract theoretical models on the functioning of the economy.

Capitalism is not a timeless system; it is a historical form of economic organisation which is not based on self-regulating markets, but embedded in the fabric of society (K.Polanyi). Its future is not written in marble.

The absence of ethical motivations in economic behaviours might be considered a fundamental cause of the global crisis. The development of financial markets as a product of the deregulation of the 80s has led to excessive risk taking and speculation which has turned to be detrimental to 'real' employment and economic activity. Nobody has ever asked whether hedge funds had any ethical purpose. This was not the issue.

The scandal of widespread poverty, even in richer countries, is another feature of unregulated capitalism. Inequality has become unbearable in our democratic societies, but this is hardly a topic for public debate.

To restore sound economic conditions , we need a radical break with the past system which is responsible for the meltdown in which we are all now. Stronger regulation and supervision in financial markets are needed along with more effective redistributive policies to protect the most vulnerable categories of the population.

Our citizens ask for full employment and more equity in income distribution, the two aspects that Keynes has strongly emphasised in his General Theory. It's time now to act, not just words or good intentions.

* Amartya Sen, Rational Fools: A Critique of the Behavioral Foundations of Economic
Theory in Philosophy and Public Affairs, Vol. 6, No. 4 (Summer, 1977), 317-344.