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  Number 165 | Abril 1995
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International

The Economic and the Social: Divorced in Copenhagen

Social goals, such as overcoming poverty, are seen by the left as morally just. By contrast, neoliberals see poverty as something that should be compensated for, but as necessary if we want economic growth. Neither side manages to overcome the divorce between the economic and the social spheres, but overcoming this split is the big challenge for our world.

Patrick Dumazert

With March's world summit on social development in Copenhagen, a new chapter is added to the series of planetary spectaculars on social issues that the United Nations has been organizing the past few years. First was the conference against poverty in Oaxaca (1993), followed by a conference on population and development in Cairo (1994) and then by the fourth conference on women in Beijing (1995).

No one can question the supreme importance of the social development issue in this profoundly changing world, with its rapidly increasing economic globalization and interdependent human problems. In this context, national efforts seem more and more fruitless, while the international agencies show no signs of picking up the ball.

Contradictory Visions

Such central themes will be discussed in the summit as unemployment, underutilization of the labor force, poverty and the participation or lack thereof of all in development and its fruits, a topic otherwise known as social integration. The summit's preparatory documents, which the representatives of all participating countries must approve, insist that human development and economic growth should not be seen as separate. Nonetheless, the main issues relating to economic growth in the poor or middle income countries foreign debt, structural adjustment programs and macroeconomic policies, international economic cooperation, the global organization of trade and the role of the international financial institutions, just to mention the main ones will continue being given separate treatment. The majority of economists and the politicians that put their recipes into practice, as well as many defenders of development's social dimension, have not yet shaken off the tendency to divorce the economy from its social aspects.

In the Copenhagen summit, the position of the international financial institutions will come up against the United Nations, which has taken up the social development banner. The separation between the economy and its social aspects could thus be reflected in Copenhagen at the highest level of international institutions.

Reconciling this separation, which has deep roots in both economic thinking and social practice, will mean pushing past conceptual, institutional and political barriers. The problem must be dealt with in integral fashion. It would be a major breakthrough if such integral contributions, well defended by those with voice and vote in such summit meetings, could show once and for all that, independent of participants' good will, such separation is not useful.

The Gist of the Problem

More than ten years have passed since the foreign debt problem became a crisis, with the resulting application of structural adjustment policies in the underdeveloped countries and recessive monetarist ones in the developed countries. Under the rule of the Bretton Woods institutions, the recipe has certainly been applied more integrally, but also more cruelly, backed by the persuasive argument of capital scarcity and the foreign debt. Neoliberal theory indiscriminately preaches reducing the welfare state and eliminating the hobbles on the free circulation of merchandise and capital on the pretext of encouraging economic growth, unhesitatingly identifying this growth with greater well being. These teleological arguments, like those on developmentalism and "real" socialism, do not aim to understand or predict, but rather to convince and prescribe; they set goals without an explanatory corpus, assuming that what they want to demonstrate will in fact happen.

The exhaustion of the growth model that prevailed in past decades and the inefficiency of state bureaucracies have thrown the welfare state into crisis. In a context of ethical values that focus on the individual and tight nuclear families, neoliberals are putting renewed insistence on the old Horatio Alger myth: anyone who wants to can pull himself up by his own bootstraps. It is still a seductive siren song, particularly since a few spectacularly successful individual examples can indeed be held up to validate its "truth." But this logical method, in which everything supposedly behaves as a simple sum of its parts, cannot be applied to complex macroeconomic systems, much less to even more complex human ones.

It has escaped no one's notice that unemployment, poverty and hunger, with their baggage of illness, exponential population growth and irreversible natural resource destruction, have grown in the countries of the South in recent decades. This has happened despite global economic growth, measured either by production or trade volume. They have grown so much that the social variables, which for our economists are simply inevitable "dysfunctions," have become a socio political problem of major proportions, a real or veiled threat depending on the case to governability and the continuation of established power structures.

In the high income countries of the North, those classified as "developed," a "fourth world" of poverty has grown recently, partly a product of the migration wave from the South. There is also growing awareness of the limits of the social democratic philosophy: that a growth economy, exclusively obeying its intrinsic rationale, at the service of social development through redistribution policies that are considered the necessary cost of social peace, can guarantee the economy's effectiveness. In the name of reducing spending and containing imbalances, the aim now is to dismantle the social protection systems that cost so much to win. They are being dismantled with no proof that doing so will renew economic growth.

Complacence of a Dichotomous Science

The separation between economic and social is found in the conceptual economic approach itself. Breaking with the thinking of the founders of classic economic science, "neoclassic" economists invented purified mathematical models based on the tautological assumption that equilibrium is more stable and thus more desirable. According to this assumption, if all individuals had equal access to information and capital and the freedom to decide, a state would result in which any modification would reduce the satisfaction of all.

The logical problem that to maintain such a state, it has to have existed to begin with is not the only lack of realism. These "thinkers" base their "scientific" reasoning on the equally unrealistic supposition that reality can be transformed through a model, and conclude that if all obstacles were removed, economic agents would all behave like the ideal individual in the model and, voilá!, the well being of all would be guaranteed.

The central weakness of their argument is that they take social individuals, with their innate preferences, as the fundamental unit to explain the system as a sum of its parts as if these individuals were like atoms in physics. They try to demonstrate how social selfishness generates social harmony through the individual hand that creates a social optimum. Out of that grow the assumptions of their models: that agents do not interfere in setting prices, that demand is infinite, that the state should not intervene, that the market is self regulating, etc.

It isn't hard to figure out that reality doesn't behave as in the models. So now these same economists try to justify themselves, alleging that the measures taken were insufficient and too timid: there is still light at the end of the tunnel, but the tunnel is longer than it looked, so we must go faster, and with still more faith! The politicians who got on the train to begin with are obliged to stick with it and even dutifully up its speed, because if they suddenly admit to doubt, a more radical rival, with a more seductive line, is always ready to take their place.

Liberal politicians seduce the electorate with images that stimulate spontaneous selfishness and the reflexes of the struggle for survival, having already convinced it that social protection systems are too costly and inefficient. Never mind that they propose nothing to replace them or improve the function of what could be salvaged of them so as to maintain some semblance of social cohesion. "Less state, more free enterprise" is the empty slogan on which they win popularity.

The Social as Compensation

Despite the theoretical models, the "real" economy's proven deficiencies and the undeniable growth of poverty, the "social" aspect emerges as a package of measures to "compensate" for the "inevitable" negative effects of the "necessary" transformations of the economy. While the concentration of wealth and global reorganization of capital the adjustment's genuine objectives go merrily forward, it is admitted that certain costs must be paid for governability. This cost often goes by the name "social emergency fund," and it and other compensatory policies are designed to "alleviate" not reduce poverty.

The social and the economic are seen as independent spheres even in the economistic perspective prevailing among those who, nostalgic for the racy development of the 1950 70 period, try to reconcile employment growth, technological modernization and intensified trade with an adequate dosage and quality of state intervention. Their main difference with those who preach globalized exchange and capital movements as key to the new international economic order is that, within the national economic framework that serves as their reference point, the social aspect is considered a justifiable goal, like political democracy. Neoliberals, in contrast, simply interpret increased poverty as an inevitable cost, the sacrifice that must be offered on the altar of economic growth.

The historic root of the common point between these two lines of thinking and political practice is in the development of the industrial economy over the past two centuries. As M. Crozier writes in Estado modesto, Estado moderno, "At least in its last phase, the system of industrial society was characterized by a profound separation between the economic and the social. The economic was conceived of as the field of absolute rationality, totally graspable through quantification, while the social aspect remained within the field of the emotional and of values." The supreme goal for some, a necessary evil for others, "the social" has always remained outside of pure economic rationality.

What economists of both currents seem to forget is that "the social" in its traditional sense that is, defined as the population's ongoing access to satisfactory health and education services, housing and environment according to predefined (albeit geographically and culturally variable) norms and assistance to the poor, incapacitated and elderly cannot simply be the product of a redistribution of the benefits of growth in a market economy, much less any other kind of growth. Such a conception comes up against the solvency of the demand for such services. Say's Law, which states that supply automatically generates its own demand, is very weak and leads to schizophrenic policies: the government must turn to taxes to finance services since the demand for them by the great majority is not stable; it gets lower the more unequal income distribution becomes. But tax collection also runs into numerous problems.

Redistribution: Costs and Benefits

Without adequate income distribution, redistributive mechanisms cannot be very efficient, as a quick cost benefit analysis shows. On the cost side that is, the tax system we find a situation in which the rich do not pay direct taxes because they know how to evade them. Although the poor are usually exempt from income taxes, they pay a large part of their income in regressive indirect taxes, which makes family consumption very expensive. Between these two, we have the small middle classes in our countries. As can be seen, the tax base is very limited, which makes formally registered businesses standing targets. And slogans such as "the heavy tax burden smashes businesses, reduces their profits and makes productive reinvestment impossible" may not be very poetic, but they are vigorously embraced.

In the 1980s, supply side theoreticians tried to scientifically gloss up the proposal to cut taxes on business profits. Practice tended to show that financial savings and upward redistribution increased, but without sparking investment. The experience invalidated the neoclassic paradigm: the assumption about identical individuals motivated by the same universal rationality could not have been proven further from the truth. In reality, different economic strata have different economic interests. And although a "general interest" does exist, which is the survival of the social group as a whole, it cannot be confused with a hypothetical and abstract individual interest in common. The discrepancy between the neoclassic model and reality is even greater when the society is more economically polarized.

So much for the cost side. On the benefit side, the situation isn't much better. When subsidies on services are generalized, they relatively favor those who could pay more for them, which contradicts the objective of reducing economic injustice. But an efficient and rational bureaucracy is needed for subsidies to be selective, which is virtually synonymous with utopia in the current context of inadequate mechanisms to recruit and monitor officials and the absence of educational careers aimed at training honest and efficient public servants. Even in countries with a long civil service tradition, with more effective mechanisms of social control over bureaucracies and in which civics and socialization are taught from primary school onward, the growing complexity of society and the qualitative diversity of individual demands oblige a reconsideration of the methods not the goals of traditional state redistribution mechanisms.

You Can't Redistribute What's Not Produced

A critique of administrative redistribution mechanisms has a different meaning in countries with a Gross Domestic Product greater than $17,000 per capita than it does in low income countries where the per capita GDP is barely $320. But an important inequality in primary income distribution prevails in all countries, based on an even greater inequality in the supply of wealth.

In his presentation to a gathering called by the Interamerican Development Bank in 1994, Monsignor Irózar Campos argued that since "the scarcity of products and abilities to produce is not the cause of poverty, economic growth need not be a necessary prior condition for the elimination of poverty on our planet." Contradicting that otherwise laudable ethical desire, the first part of which we fully agree with, it is necessary to understand that production is a dynamic phenomenon. Dividing up static, already accumulated wealth, whether through charity or the intervention of some Robin Hood, would only resolve the problem if the new distribution of the wealth contributed to increasing the future product in a lasting way, year after year. It would have to create new wealth in other words, growth.

More equitable income distribution in societies with very unequal endowments of patrimony among their members must necessarily be done by improving access to jobs with acceptable salaries. We are reminded of the correct claim of the classics, according to which labor is the source of the creation of wealth. The "occupational" variable thus ceases to be a byproduct, a virtual adornment, of economic programs, and takes its rightful role as a motor force.

The occupational variable obviously cannot be treated the same in the North and the South. In the North, the technological pattern has been toward a more intensive use of the labor force, but the supplementary labor force could be absorbed by the new service activities as long as it increased its skill levels. In the South, in contrast, neither industry in the past nor services now have been able to absorb the surplus rural labor force due to its low level of skills.

Small peasant production units have a particular role in this regard. An important level of underemployment prevails among them, but is due to insufficient land in only a small fraction of them. Among the others, market problems, unfavorable international exchange prices and policies of keeping domestic prices low to stimulate earnings rates in urban industrial activities are responsible for visible and invisible underemployment. This explains why the agrarian reforms done with charitable or political criteria were unsuccessful. Land should not be given to peasants as a "just social demand" or because they have been "political allies." It should be done because the peasant sector has enormous economic potential. Political forces as ideologically opposed as the Communist parties of Eastern Europe and the US occupation army in Japan did it for that reason following World War II.

The 1993 World Bank Report states that "in no region of the developing world are the contrasts between national poverty and wealth greater than in Latin America and the Caribbean," a region also characterized by " an exceptionally high level of inequality in income distribution." Further on in the same report, the following statement is eye catching: "Raising the incomes of all the poor on the continent to a level immediately above the poverty threshold would only cost the equivalent of a 2% income tax applied to the wealthiest fifth of the population."

An Insurmountable Contradiction?

The issue is not to "delink," to decide not to compete in international trade. The countries of the South in particular, with their dependent and extroverted economies, must admit to their dependence on imports and thus to their need to export to finance them no matter what development model they use. It is correct to increase the national value added and thus increase the exportable surplus, which produces development. But exporting just to export, based on cheap resources, in the name of "comparative advantages" is incorrect. It could unleash a vicious circle of impoverishment, destroying natural resources and human capital. Such comparative advantages are really social disadvantages.

In addition, three strong tendencies in the economic system as a whole cancel out the potential short term benefits that could be obtained from a strategy based exclusively on exports. They are: 1) the increasing absorption of financial resources to service the foreign debt; 2) the inevitable deterioration of the terms of exchange together with growing dependence on technology generated in the multinational corporations of the North, jealously protected by trade patents; and 3) the volatility of private finance capital which can, in just one night, cancel out all the benefits achieved at the cost of ecological destruction and impoverishment of the masses.

All of this is precisely what is at stake in the Copenhagen summit. Some will try to defend a universal and totalizing economic strategy based on constituting a new planetary economic system made to order for the ambitions of finance capital and subjected to its logic. Given such a "noble" objective, the problems facing the economies of the South can only be resolved through greater social restrictions. Others will defend the need to raise social spending to reduce distributive inequality. But this assumes growth, and growth is subject to solving the above mentioned problems. What can we hope from this contradiction then? Probably very little.

The World Bank itself reflects this very contradiction in the report mentioned above, although it is hidden behind the Bank's characteristically elegant language. At one point the document states that "the adoption of probable economic stabilization measures is of primordial importance," adding further on that "policies aimed at promoting a growth that reduces inequalities are equally important." Even before these two priorities, according to the Bank, is "first to assure that future growth generates productive employment opportunities at the reach of the poor." With respect to the emergency employment plans, only temporary transfers, "which are perhaps needed," are considered. Perfect. But what happens if the stabilization process never reaches its goal and the transfer programs slowly eat up the whole public budget earmarked for social investment? In fact, what happens if the whole stabilization process is suddenly undermined by a movement in Wall Street's Stock Exchange, as just happened in Mexico?
Everything contributes to making the economic and the social two contradictory objectives, two apparently irreconcilable areas of concern. As long as the economic is defined solely as marketable production and the social as the unproductive consumption of a wealth that is perceived as sidetracking it from its "economic" destiny of producing merchandise, no reconciliation would appear possible between these two areas. The best we could hope for is some compensation; or else the inevitable subordination manifested in such frequent expressions in the South as, "Our country isn't wealthy enough to have a level and quality of social services like the industrialized countries." The North's variation on this same theme is, "We cannot continue maintaining social service levels that reduce our competitiveness with the developing countries." As long as the premises and terms of this contradiction between economic and social are accepted, international demonstrations in favor of "social development" and events like the Social Summit in Copenhagen will just be puffs of smoke or, said more cynically, a way to clear one's conscience.
In all probability, the divorce between the UN rhetoric, particularly that of its Development Program (UNDP), and the international financial institutions, familiarly known as the "Bretton Woods Twins," will be evident yet again in Copenhagen. Analyzing the difficulties of the Salvadoran peace process, Alvaro de Soto, the UN General Secretariat's main political adviser, asks: "Can the international community go on trying to resolve important global, multidisciplinary questions in mammoth meetings that are hard to handle?" In a concrete experience like pacification in El Salvador, according to De Soto, the incompatibility between the developmentalist approach of the UN peace plan and the structural adjustment instigated by the international financing institutions shows up clearly. Obviously the polarization of Salvadoran society itself was long subjected to this schizophrenia. But has social polarization not been the rule in the very countries that most need integral support to overcome poverty?

Proposals for A Different Route

The alternative route begins by considering the social as not substantially different from the economic, by going from a dichotomous science to a science of multidimensional human beings, by replacing a schizophrenic policy with an integrating and coherent one, by healing the split in practice and in institutions.

A great deal could be done in both the South and the North to increase educational coverage and the quality of teaching, prepare socially and ecologically responsible individuals, increase the quality of urban life, slow down the rural exodus, combat illness and prevent the development of endemic epidemics, and stop the degradation of non renewable resources and contamination of the environment and drinking water. In the final analysis, health and education is not current spending but investment in human capital; conservation work and cleaning up the environment should be considered the same way.

An ambitious program based on a conceptual change is required to completely overcome this erroneous separation between the social and the economic, a program made concrete in coherent policies that advance along at least five fronts simultaneously.

1. The Ecology Front. In addition to the investments needed to recover forests, protect the soils and clean up the water, others must be made in recycling techniques, industrial waste treatment and the maintenance of existing equipment and physical installations to lengthen the useful life of productive capital and durable consumer goods. The rhetoric of "technical progress" and "wellbeing" is the public logic used to justify building everything from razors to computers and cars as if they should be disposable after an absurdly short useful life. The real logic, though, is the need to rotate capital faster and thus maintain high earnings rates in the system of business competition.

The central framework of "eco-development" described by Ignacy Sachs is "to save raw materials and capital by recycling waste and materials" and "more methodical maintenance of equipment, buildings and infrastructure which translates into lengthening their useful life." This frame is based on the central paradigm of tomorrow's economic science: although work is indeed the source of the creation of wealth, this creation is made by transforming not creating finite material and energy resources, which should be saved and renewed. The main source of renewable energy on the planet is photosynthesis, which gives agriculture, particularly sustainable agro-forestry, a central role.

Eco-development also has major significance at an urban level. It is not enough to produce more materials using less non renewable energy sources or using renewable ones more intensively. It is also necessary to destroy fewer materials, which, in addition to its obvious ecological significance, is even important within the classic paradigm of the worker producer of wealth. In effect, reducing wear and tear on capital by using more labor intensive measures maintenance and repairs always need a larger labor force than mass production not only helps reduce the waste of natural resources but also increases employment.

2. The Production Front. It is urgent to try to increase the accumulation capacity of small rural family units of production, which in the South are the main reservoir of unemployed labor as well as the main ecological threat. Because they must try to survive in precarious production conditions, they contribute to turning the rural areas into deserts, and because of the massive rural exodus they contribute to the growth of megalopolises. Despite all this, it is not at all contradictory to recognize that these family units are also the main potential agent for creating national value added and the main economic actor that could take responsibility for preserving the ecosystem. Many generations of European peasants did it in the past, and without their patient productive family accumulation, neither mercantile accumulation nor the industrial revolution would have been possible.

A new phase of the "green revolution" could respond to this sector's massive demand. But it would have to be purged of the bias of its technicians and planners toward technological developmentalism, a bias that has eliminated labor and blindly imitated "modern" technologies over the past three decades. It would have to be on the condition that this new green revolution be accompanied by new forms of access to credit and the creation of appropriate financial institutions that are free of the paternalism of traditional state development banks, the fearful elitism of the smaller private bankers and the money grubbing of local usurers. It would also have to be on the condition that funds are created to stabilize the product markets, since the cyclical and competitive supply of these products must cope with a very inelastic market which doubly favors intermediaries. It would have to promote growers' associations against the damaging effects of the oligopolist input distributors and create adequate instruments to regulate land markets, which generally function to reconcentrate land more effectively than the outmoded coercive methods of the past's traditional large-holders.

3. The Social Front Supplying the immense deficiency of social services, whether education, health or habitat (housing, urban social spaces, environmental hygiene), as well as responding to the demand for services linked to the "non productive" use of free time generated by technical progress, implies tremendous job creation. Given that we are speaking of the production of basically "non transferable" goods, whose productivity is not very different anywhere on the planet, the countries of the South and the East are in a relatively advantageous position with respect to countries that enjoy very high salaries. It is not necessary to wait for prosperity to begin building a developed social system. On the contrary, redistributing resources toward the "social sector" could have low cost indirect benefits.

The income distribution implied by these activities provides the increased domestic demand that primary or transforming production needs. There is no fatal destiny or unavoidable logic that says that regions such as Central America must become big free zones working for export based on foreign capital and miserably paid labor. On the contrary, even such an ultraconservative economist as R. Lucas sees the inability of the neoclassic economic concepts to forecast as "a central question for economic development" and the differences of human capital among countries and their "externalities" as a central explanation for why the marginal benefits of identical quantities of capital are radically different between rich and poor countries.

There is no need to demonstrate the need for such investments in human capital to guarantee tomorrow's development; this issue is very "in" today. But we should distrust the devaluing of the ideas that usually accompany its endless repetition in official discourse. At times, those who defend a new conception of what is social critique as reductionist recovery the nexus that economists usually establish between social spending on health, education or improved quality of life and the formation of human capital. "Invest in Health" is even the title of a 1993 World Bank report. But we should be pleased by such assimilation, since it shows the positive evolution of such concepts and of economic science itself toward greater multidimensionality.

4. The Geographic Front. The growing problem of population concentrations in urban centers that destroy the quality of life and the environment cannot be dealt with only by slowing down the rural exodus and making small rural production viable. Secondary and tertiary activities must also be effectively decentralized, and the stellar advances in communication have made this technologically feasible.

In many countries of the South, particularly in Latin America, the concentration of industrial and service activities in big cities is fed by the continual labor surplus generated by the blockade of the agrarian economy. In the industrialized countries, it is fed by the race to technologically "modernize" agriculture. This phenomenon is not only an ecological threat but damages the quality of life of the poor majorities. A new concept of spatial organization, reversing urban concentration, would both generate jobs and offer new investment opportunities.

5. The Infrastructure Front. The traditional recourse to public investment to expand productive infrastructure is far from exhausted. No matter what economic and social model is chosen, private investment, if it is to be profitable or even stimulated in the first place, requires adequate infrastructure. Due both to its slow maturation and its always concentrated and oligopolist character, this infrastructure should remain in the public domain, independent of the kind of financing or any partial exploitation concessions.

Many countries are recently emerging from armed and often endemic conflict. Whether these conflicts resulted from old rivalries generated by colonization and a later redistribution of territories, or were provoked more recently by new imperialist enterprises, they were always egged on by the need to find new roles for arms production, particularly in the post Cold War period. These countries' investment needs obviously go beyond simply replacing destroyed infrastructure. Their demand for investment goods could increasingly compensate for reduced activity in the old military industrial complex.

With What Financing?

It is time to recognize that technological development, as conceived of and practiced in recent decades, eliminates more jobs than it creates. Eliminating productive activities in the North and relocating them in the South to take advantage of a cheaper and less unionized work force is one way to maintain profits in the face of worsening competition and to escape national tax laws. But it also carries the seed of its own destruction in that it reduces global demand, which is the motor force of economic activity in a market economy.

The latest UNDP report is very eloquent in this respect. According to it, the total product of the majority of countries grew 20% more than employment between 1975 and 1990, a tendency which appears to be only sharpening in this last decade of the century. This phenomenon is particularly marked in the Organization for Economic Cooperation and Development (OECD) countries, as well as in the Asian ones, where its consequences are much more serious due to their high population and labor force growth rates.

Contracting demand and the resulting profit crunch, which once again threaten the capitalist economy, are aggravated by the fact that the globalization of the system has gone beyond the limits of traditional state regulatory instruments, but these instruments have not been replaced by more adequate ones. Nor, obviously, do the Bretton Woods institutions fulfill this function, since they have the sad role of being hard on the poor and soft on the wealthy. Given this reality, private interests are reacting as they always do they are speculating in financial mirages only now at a greater scale than in the past. A trillion dollars a day moves just through the money market!
Reversing this tendency first assumes making use of this monstrous perversion of the economic system, tolerated by the laxity of the international institutions. Nobel Economic Prize winner James Tobin, for example, proposes a tax of 0.05% on this foreign exchange market. This alone would bring in US$150 billion a year, which would allow the public investments of developing countries to double.

After that, the "peace dividend" must be applied, and effectively. According to UN estimates, a 3% annual reduction in world armaments spending in the 1995 2000 period would free up US$460 billion for investments in social capital. The military spending of "developing" countries alone equals US$125 billion. With only 12% of this, primary health care could be provided to the entire infant population of the South, malnutrition reduced and everyone supplied with potable water.

In the third place, the developing countries' foreign debt must be reduced, by means of the market (the trade debt), by political means (the bilateral debt), and by modifying the norms by which the multilateral agencies function. This last point, which only the wealthy nations that finance these agencies can decide, obviously assumes that the elites of the "poor" nations who would benefit most from reducing the debt would take positive steps toward a new world economic order by investing their earnings productively in their own respective countries rather than in the circuits of speculative international finance.

The Deadly Debt Trap

It is unthinkable and useless to formulate expectations of social development in the poor and severely indebted countries without proposing an overall and definitive solution to their foreign debt problem. The debt trap batters these countries because it cancels out the normal relationship between their export efforts and their investment possibilities by reducing their credibility as receivers of capital and even as trade partners. The international community should deal with this from an overall geo-economic perspective that allows these countries to return to a viable position within the concert of nations.

Unless the aim is for these countries some 50, according to World Bank statistics to definitively sink into poverty and their populations to gradually or suddenly invade the wealthier regions of the globe, a radical solution must be proposed and put into practice. The terms of this proposal "the terms of Copenhagen" could be: an overall reduction of the debt stock of the severely indebted low income countries (SILICs) and severely indebted middle income countries (SIMICs) to 35% of their current GDP and a debt service no greater than 20% of their export of goods and services over the next five years.

Even more important than the figures themselves would be the implementation of these "terms," which would include the following clauses:
1. Unilaterally pardon the debt that is objectively unpayable; that is, the part of the current debt that has to be borrowed to keep the future debt from continuing to grow or require renegotiation in the future.

2. Convert the "payable" part of the debt service based on what was paid in the past three years, for example that exceeds the maximum limit of 20% of future exports into social development investment (formation of human capital, living standards for the majorities and ecological protection).

3. Reduce and convert the debt sums to middle income creditors according to the same terms, but in exchange for equivalent treatment by these countries' respective creditors.

Finally, the tax systems must be revised in both the South and the North. In the South, the fiscal impunity of well off sectors and the inefficiency of the fiscal administrations force the poorer classes to indirectly bear a large part of the tax burden. In the North, the progressive tax systems, won at great cost in the past, are being dismantled in the name of questionable and undemonstrated economic "laws" led by populist slogans.

There is unquestionably enough financial savings, arms waste and inequity in income distribution to ethically justify the possibility of social investment and even demonstrate the economic sustainability of such investments. But that is not enough. As projections of the world economy in any of the subcontinents or geo-economic blocs make evident, the dominant tendency is jobless growth. This clearly shows that the problem of solvent demand has no sustainable economic solution without a change in the system's deepest logic.

This change should be "the revolution of the social." Although initial financing through the "peace dividend" or a tax on speculative financial activities may be necessary and even ethically desirable, the true motor force of the new model of co development on a planetary scale should be found within the model itself. It first assumes reconciling the economy with the social. Or, put another way, it assumes that the economy cease being "one dimensional," and that the social shift from being a compensatory or residual cost of economic growth to being a central element of future demand.

"Both sides of the scissors cut," said Alfred Marshall in his time. Social activities guarantee their own solvency, given their high labor force component. The income distribution that they imply will be the best guarantee of the sustained growth of solvent demand that the new investments require to be profitable. What each country can no longer do alone without a costly and possibly useless "delinking," all nations can undertake together, as long as they are all willing to provide a solution to the speculative world of the foreign debt that is not merely financial and short term and to stop the flight of "countryless" financial capital. And above all, if they are willing to invest massively in the economy of the future: the social.

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