Thursday, April 28, 2011

Tribute to Gérard de Bernis

My beloved master, Professor emeritus Gérard Destanne de Bernis, passed away on Christmas Eve. He was an exceptional man in many respects, by his monumental work, his political engagement in ideas he believed in and his intellectual honesty. His writings and lectures were a testimony of his brilliance.

He had a strong influence from F.Perroux, a great French economist, who achieved an original synthesis of Schumpeter and Marx and elaborated a critique of the general equilibrium theory. His main contribution  to economic theory was to introduce the concept of 'regulation' - which was developed by French philosopher Georges Canguilhem- just as   scientific concepts elaborated by physicists and mathematicians to explain dynamic phenomena. In fact, he developed a general theory to explain the dynamic of capitalism and its crises in a historic context. This was a lifetime endeavour: his main writings date from the 70s and the 80s, in particular his impressive text-book on international economics.

His development theories will be largely influenced by Perroux' ideas on the role of power, domination and assymetries as well as structuralist economists (Gunnar MyrdalPrebischFurtado). He introduced the concept of "industrializing industries", close to the idea of 'growth pole' developed by F.Perroux. The idea is that certain industries may drive the entire development of an economy due to stronger linkage effects with other industries as well as growth enhancing effects. From a general perspective, de Bernis will defend a model of 'endogenous' development  open to international trade, but this openness will have to be controlled by the State to protect domestic industries from external domination of foreign capital, at least at their early stage of development. His ideas were put in practice to a large extent in the 60s in Algeria and Tunisia. 

Nevertheless, Prof. de Bernis was not a pure academic. His research work was entirely conceived as being instrumental to the critique of 'mainstream' economic analysis and policy. He was, in that respect, an"organic intellectual" (Gramsci) fully committed to the ideals of justice and  equity though he always acted as a free public thinker.  Many of his students and companions will recall him as a relentless worker for this cause.

He was profoundly inspired by Christian values, which mean in their essence the pursuit of social justice and the liberation of men from any form of exploitation. He was an ethical economist with a strong belief in human action to change the existing order. He had a nature that was worthy of  admiration and profound respect and those who knew him will keep his memory alive.


Euro divergence

There has been quite a lot of discussion among academics ( but much less among policy makers) on whether the euro is irreversible.  Economists have discussed at length about the adjustments that the introduction of the single currency would require, in particular on labour mobility since exchange rates are fixed.  In fact, this problem has been ignored by European governments focusing only on nominal convergence.  But this is not compatible under current circumstances with real divergence and slow growth. 

After setting up the fund to tackle the debt crisis in Greece and Ireland, Germany has imposed a 'pact for competitiveness' to introduce wage moderation along with austerity in public finance.  The main reason is that the adoption of the euro by most European member States led to a period of low interests in southern Europe which triggered an inflationary boom accompanied by a financial bubble (in Spain and Ireland). But when the boom ended, these countries became uncompetitive with northern Europe. Now, the European central bank is adapting its monetary policy in order to address this competitiveness gap via deflation in the south and inflation in the north, especially in Germany.  

This phenomenon is well illustrated in the graph below* which shows unit labour costs, with 1999 =100. the red line is Germany, he black line is France; the green line is the ECB's 2 per cent inflation target; the blue line is southern Europe. 

This may sound unorthodox, but there is an urgent need to address the issue of real divergence, which means increasing real prosperity in the poorest areas of Europe to make it work better and in a more sustainable manner. This implies, above all,  mobilizing funds for large investment programmes in Europe, which will pay off and reduce deficits as a result of higher growth and trade integration. 

Monday, April 11, 2011

The Age of Risks

The gigantic cataclysm in Japan has stirred people's conscience that we have entered into the "global risk society "*.  This means that our society is increasingly concerned about the future and has to deal with hazards and uncertainties induced by modern life. The magnitude of the disaster has no precedent in history. It had large human consequences and social costs;  the material damage is estimated in more than 200 billion dollars, around 4% of Japanese GDP.  The point of issue is whether this could have been avoided, at least not in that magnitude.

Human beings are always subject to a level of risk, such as natural disasters which are largely perceived as generated by non-human forces Since earthquakes cannot be predicted, we do not know when tsunamis will happen before the earthquake occurs. But it is established that tsunamis occur on average twice a year throughout the world and inflict damage near the source. It is if like the inner core deep inside the Earth have waken and created a rupture in the laws of natural equilibrium putting at risk the survival of many animal and vegetal species. But the other side of the Japanese disaster concerns manufactured risks, which are the product of human activity. For example, the disaster caused by the nuclear plant in Fukushima led to a decline of public faith in nuclear technology and a growing concern for sustainability.

Mankind suffers from loneliness in an ever crowded world. As the Polish sociologist Z. Bauman explained,  the paradox is that the more populated are our cities, the more we feel lonesome, frightened and quarrelsome. Without any hope in the future, without a memory of the past, our world is flattened on an unsteady present.

However, the age of risks which has put in question the sense of our existence has nevertheless triggered positive energies in terms of creativity, wealth creation, desire for freedom and rights. The Arab revolutions which rose a couple of months ago has extended from the Atlantic to the Indian Ocean. Their heroes are young people, men and women; they want food and freedom but they are not illiterate, as they gather and communicate through websites and their weapons are the modern technologies.

This 'social' tsunami has a social and political intensity which is similar to the geological phenomenon which convulsed the oceans. The human wave swept away corrupted regimes and claimed equality, dignity and freedom. This was the essence of that pacific revolution which is still pervading the Arab world.

Globalization and technology have introduced in the social fabric the concept of communicating vessels. Immigration from poor to rich areas is a 'social tsunami', and it would be vain to try to block it with populist arguments. Governments need to govern it as best as possible in the medium and long term and prepare for the tide. In the countries where natural disasters occurred,  they will engage in rebuilding houses, railways, anti-seismic construction; in the 'global risk society', they should engage vigorously in a culture of solidarity and hospitality, a diverse division of work and a diverse concept of citizenship. Those who think that erecting walls will contain the human tide, will only render it more destructive.

The main thrust of these changes is to build up progressively a new model of development based on sustainability (in the wide sense) and social justice. The logical premises exist  but the forces of resistance to change may still be very powerful.

* Risk society" is a term that emerged during the 1990s to describe the manner in which modern society organises in response to risk. The term is closely associated with several key writers on modernity, in particular Anthony Giddens and Ulrich Beck. The term's popularity during the 1990s was both as a consequence of its links to trends in thinking about wider modernity, and also to its links to popular discourse, in particular the growing environmental concerns during the period (from Wikipedia:

Monday, April 4, 2011

The economic consequences of our folly

Austerity is a terrible idea and it is probably a wrong one. It has become the mantra of European governments, the word most often quoted in 2010 . Why we should combat austerity policies may seem quite obvious in the light of the enormous consequences of the crisis. The same debate took place in the 30s- and we know how things went.  Yet, mainstream economists continue to deny the evidence. As such, it is a sound idea if we mean 'putting your house in order'* . But this is far from being true. Austerity policies aim to cut deficit due to excess of debt but it also lowers spending and also reduces the amount of benefits and public services provided.

One of the strongest opponents of austerity, P.Krugman, wrote (NYT March 25) "... we have a political climate in which self-styled deficit hawks want to punish the unemployed even as they oppose any action that would address our long-run budget problems. And here's what we know from experience abroad: The confidence fairy won't save us from the consequences of our folly"
 In Portugal, the government resigned due to dispute over an austerity package - the PM, José Socrates argued that he did not want his country to end up like Ireland or Greece. But it is now urged to pass an austerity plan, though this will not suffice to avoid a bailout.  

Ireland is still struggling with a huge deficit due to the bailout of its banks and imposed to its citizens savage cuts in public spending to reassure financial markets.  It does not seem to be enough for them as  yield rates rose up to 10% for the first time since June 2009 and the unemployment rate now stands at 13.5 percent.
In Britain, the government decided an unprecedented austerity policy with savage cuts to civil service (almost half were made redundant), a huge increase of university fees and further cuts to public services.  The economic forecasts are not encouraging -  there is no sign of economic recovery and deficits are set to increase in future. The Labour party leader, Ed Milliband is now regaining popularity among the electorate with a left wing discourse emphasizing the excessive inequality and the fact hat the disadvantaged classes are paying the price for austerity.

The underlying  assumption of austerity policies is that they will restore confidence which will create jobs and growth by the fact that private investment will then crowd in and more than offset the government's spending cuts. In economics, this idea stems from the belief in the existence of a general economic equilibrium which predicts that economic fluctuations revert back to a "normal" state of affairs automatically. 

Austerity policies had the opposite effect with  further depressing growth and engendering deflation which increases the value of debts. This can also cause countries to fall into a liquidity trap causing credit markets to freeze up and unemployment to increase. In some countries such as Ireland and Spain, austerity measures introduced as a response to the financial crisis proved ineffective in combating public indebtedness and placed those countries at risk of default in late 2010. 

On the other hand, fiscal expansion is not always the right thing to do, but in times of recession with high unemployment, it is the only policy measure to restore a situation of equilibrium. Because we are in a crisis situation, we need unorthodox measures, so jobs first then cut the deficit later is the right strategy as tax revenues will increase with the effect of closing the deficit.  Unfortunately, this strategy has been abandoned  in the face of social injustice and unemployment. 

*The term economics comes from the Ancient Greek οἰκονομία(oikonomia, "management of a household, administration") from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)"(from Wikipedia)