Theme Report
Abidjan 2012
LI 58th Congress
RICARDO LÓPEZ MURPHY
Introduction
The economic growth process
The increase of a society’s income is made up of the cumulative outcome of the increase in the quantity of productive inputs and of its shared productivity. These productive inputs are labor, physical capital and human capital.
The notorious improvement of per capita income in developed societies is a direct consequence of a rapid increase in the physical capital per worker supplemented by a more qualified working force (that incorporates better knowledge and training) in a context of improved technology and allocation.
This classical description of the sources of economic growth could lead to a simplistic and mechanical reading of the process to be verified in every structural social or institutional environment.
Such is not the case being that one of the biggest contributions of classical economics is the stress on the incentives regime which creates the automatic and spontaneous allocation of resources (the famous “invisible hand”) and also to the cultural and institutional environment that generates this.
The different performance of societies have been previously been and simultaneously linked to creation of the value and institutional context that tend to a better allocation efficiency, both in static terms, such as with the resources available, as well as in dynamic terms, as in the case of accumulation of the inputs mentioned above.
The purpose of this paper is to present a conceptual and practical approach of the promotion of economic development accompanied by social inclusion. This approach intends to serve as a successful benchmark to liberals, which are often accused of achieving economic growth at the expense of social inclusion. This work answers to this critique, showing that both objectives are not mutual exclusive and that they can be implemented at the same time.
In the first section this work addresses the theoretical foundations which deliver fourteen key elements that trigger the successful social inclusion in economic development. These are:
The second section shows how these theoretical foundations are applied in Latin America through an analysis of two antagonistic tendencies that prevail in the region, based on the establishment and fulfillment of the institutional, economical and social inclusion rules and on the abidance to the law and the Constitution. After revising both categories the conclusion is that, once again, Latin America, as in the rest of the world, has the opportunity and the duty to fight, strongly, for the defense of freedom, only then the Socialism of the XXI century will be defeated and social cohesion and economical progress will be achieved.
Section I. Theoretical Foundations.
A decisive factor is the institutional framework that specifies and guarantees property rights. These allow the internalization of efforts and its projection in time, enhancing the rationalization of the saving efforts that implies the postponement of consumption vis à vis its imputation to differed consumption, key to the accumulation per capita and the technical and allocation progress.
This appropriation is what mobilizes the action. Furthermore, the market economy, characterized by spontaneous and of consensual action, does not work correctly when its goods or products aren’t appropriable or when externalities or spillovers are present. In that case, there should be a complementary and unpredictable institution, the State, to address the difficulty of appropriation, which can derive from the indivisibility (absence of rivalry), from the difficulty of establishing the exclusion of consumption, or from the effects of the spill.
Property rights are an irreducible part of this mechanism as is the acceptance of a judicial framework common to all parts, and existence of a standard and a mechanism for conflict resolution that guarantees the explicit and implicit contracts that social interactions generate.
In the complex evolution of modern societies, that triple interaction of spontaneous accumulation, property rights and its multiple contractual components, and a resolution of conflicts mechanism with a State that monopolizes the use of force and violence, and restricts and limits de legal process to enhance the free and spontaneous actions, is the result of an evolution that took humanity centuries to build.
The combination of market economies with governments bound by law, eligible and responsible before its citizens is the greatest contribution of liberal ideas and of the political process they promote: simultaneously the human progress in the economic and personal liberties in the political sense.
The grasping of this extraordinary development of the human society, its learning and objective conditions provided the space for these liberal ideas which in time fed back the same process and its incredible advancement throughout the centuries and that now offers a great aesthetic quality.
Generally speaking, the greatest limitation and uncertainty, the fear of the future, are born out of its instability. At the heart of a thriving economy shines the certainty of its unconditional respect. In the extractivism and predation lies its failure.
Property rights are not just violated just on abuse or lack of protection by the state organisms.
Excessive contribution is a very subtle form of divestment but still upsetting for the process.
If the agents who generate the total productive efforts are extracted, the appropriability of the actions are essentially weakened and the outcomes of the efforts made, disassociated.
The same damage can be done with regulations that inhibit the essential use of resources.
Naturally, confiscation and collectivization are extreme versions of tax and regulatory excesses.
When rights are lost, incentives have collapsed and the project of a free society becomes an illusion.
A free society does not only imply the absence of state coercion and creative a space, but essentially needs a competitive framework that impedes and inhibits the monopolistic actions of groups which concentrate economic resources or political power.
The defense of competition is at the centre of preconditions and organizational requirements of a inclusive, efficient and free society.
Competition is what prevents the abuse on the disparity of economic means and what enhances the optimization of the resources.
The defense and promotion of free competition is a central responsibility of the State and the Rule of Law.
This has an external dimension which is the opening of international trade, investment and transmission of technology.
Thereby, economical integration and the rules it establishes are at the center of free societies.
The combination of an external exchange, free and defined by international treaties has been complementary and enhancing the efforts of building a domestic competitive environment.
Crucially, that implies the crucial absence of capture and subordination of the State under corporate groups that are capable of generating the prebendary behaviors, like granting themselves prerogatives that are unreachable to the average citizen.
This tension lies at the heart of the struggle for a free society.
That is what has allowed the progress and cohesion of developed societies.
The failure of societies that have clientelar and patronage regimes is also explained by the capture of the State and its power of coercion by groups that manage to get exempted from obligations that most of the community must fulfill, establishing restrictions to competition and subsidies to their investments.
The fight against privileges, escutcheons and prerogatives lies at the heart of the liberal ideology.
Commercial activities and, denial of leisure, business, require the cultural acknowledgement of work, the will of accumulation and the absence of risks.
Ultimately, the presence of entrepreneurs who are willing to discover, innovate and take risks is the motor of growth.
It is not often perceived that the success of an entrepreneur carries implicitly the failure of hundreds that also try but not succeed, cumulating lost of efforts.
Ex ante all the resources destined to these tasks are enormous; ex post we only observe the successful cases, those which imply highly differential retributions because the esteemed value by the actors must allow to cover and remunerate the compromised resources.
The final observation implies the return of resources to all efforts engaged, randomly.
One useful comparison is perhaps the discovery of oil which is highly profitable when talking about a successful well, although its return is normal, so all the wells are captured simultaneously and failed ones also that accompanied the effort.
At the center of the whole economic organization is the acknowledgement of this implicit rule and of the incentive mechanism that it entails.
Distribution cannot be evaluated ex post, therefore we must recognize that it is generated from the resources that are engaged ex ante.
This cultural respect for the assumption of risk and access to its fruits is vital to free societies.
All actions of citizens and the economic agents have an intertemporal dimension.
Consistency and predictability of the rules of the game are vital.
A limited government with appropriate checks and balances, division of power and transparency is crucial in order to avoid opportunistic behavior.
Rules regarding the budget and public credit, which ensure that transitions are parsimonious and opportunistic and dishonest behavior in public finances cannot occur. In other words, a dishonest, opportunistic government induces investments only to implement drastic changes once investment is effective and the flexibility of reassignment of buildings and machinery is very low.
European and Latin American experiences with the last economic crisis obliges to establish rules for a government’s fiscal policy and the use of public credit as well as social security programs to make them budgetary consistent.
Current and future public deficits corrupt the savings in a society and destroy the investment capabilities of the private sector. Is in there where the engine for a productivity rise and the improvement in quality of life lies in developed societies. Which is why a liberal order implies a budgetary discipline, both explicit and implicit, to avoid the budgetary opportunism and the predation of investment.
Equally important, every transaction and contract requires a measurement unit and an instrument for change which constitutes an intertemporal reserve of value. For this reason politics and monetary order must not be subordinated to the circumstantial necessities of the current administration. Here lies the importance of monetary stability, so to avoid the imposition of implicit or not legislated inflation, but also to promote a climate of predictability and optimism towards the future. Therefore, some societies, in order to avoid currency manipulation in hands of a specific administration in power, have created a continental currency or a rigid allocative pattern guided by the central government.
So, stable and balanced budgetary rules, healthy currency and the absence of discretion, arbitrariness and sudden actions of power are the essential components of free and successful societies.
A crucial risk to be taken into account is the sustainability of the growth process. The greatest risk derives from the non appropriability condition of natural resources, which can tempt the economic agents to predate goods that have no propriety, like the environment or common resources, and not incorporating the costs of its depletion for the community.
The internalization of those costs and the preservation of the common resources which are inherited generation after generation must be the core of all public policies. Where there is no owner, looting will occur. The institutional design must allow for the incorporation of those costs, which affect all society, into the organizational framework.
The loss of horizons is generally a consequence of the presence of subsidies on energy consumption and the abuse of common goods, as they do not emphasize the rights of future generations. The intertemporal myopia is associated to the failing nations, the looting societies, concentrated on short-term objectives with high interest rates and a budgetary mess. In a way they are like nomadic societies that do not live in one and the same environment and therefore underestimating the consequences of their actions.
For a successful order, it is equally important a fiscal or monetary regulation, as an environmental one. Disorder in one aspect leads and are associated to disorders in another. It is the same myopia we encounter in cultural and natural heritage in societies.
Just as excessive indebtedness steals our future; environment predation that subsidizes present consumption, steals it too.
The greatest drama of modern societies is the risk of a State captured by corporate interests that can extract the productive surplus and dissipating the income of other social actors. State, in free, prosper societies guarantees contracts, judicial mechanisms of debt collection and a conflict resolution framework. It also provides public goods, remedies inapropriability and contributes to the creation of a climate for better opportunities with the greatest possible equality of access to them.
When States control and administration becomes a booty of the ruling party to enrich certain groups, persons or corporate sectors, in a free society the State loses its functionality and its raison d’être in a free society. Because of that, equality before the law, nondiscrimination, and the absence of extracted transferences for the grant of privileges are an essential part of a citizens society, are characteristic of the guarantees granted in a free social order. For this, transparency and free press are vital. The capacity to criticize and audit, the limits to the obstruction of competition and the equality of rights are essential.
In a limited government there is no room for clientelism and patronage. Public resources are not used to reproduce power. The exercise of power is temporal, alternates in just competition for the access and eligibility. This is the greatest guarantee of the citizens’ rights. There is not better environment to promote social mobility and the interest of vulnerable groups for there is no bigger initial endowment of resources than that of a political regime of a contained government.
The essential feature of an authoritarian government is the use of the State’s power to grant privileges, promote inequalities and the enrichment of prebendary groups. The concentration of political and economic power is what enables unequal, exclusive, and non-progressive societies.
This shows the importance of the subsidiarity principle because it decentralizes power by giving responsibilities and tasks to civil society and to the local governments, and by doing so, the power of the State and taxation cannot be used to loot everyone else.
To prevent the abuse of state power a prerequisite is to avoid the capacity to establish subjective and discriminatory measures. These latter are highly difficult to implement if there is an open economy for international trade, where there is internal competition and a stable monetary framework policy is stable.
The key to privileges are monopolies granted by the State, an economy created by price control regimes, and an inflationary context that obscures and confuses information.
The idea of working hard in order to earn one’s bread, depending on one’s self-effort and being responsible for one’s survival is an essential part of the organizational framework of a free society.
The cultural idea of working hard for living good is essential, depending on self effort and responsibility of one survival.
The cultural precept that rejects gifts and alms, promoting self-esteem and establishing a person’s value by work, and autonomy as a citizen and economic agent is vital for societies that respect freedom.
Clientelism and alms require taxing others in order to finance those public expenses. The dispute for receiving grants and favors consumes the vital energy and creativity of societies and throw them into a vicious cycle. In fact, it establishes a system of divestment that undermines the legitimacy of public policy. Of course the ones that get the grants aren’t the most vulnerable.
Once clientelism starts all kinds of income seekers will surge, as well as corporate and political patronage, undermining the norms of the Republic and hijacking the state apparatus for looting and constructing asubmissive machinery that enables unlimited reelection.
Thus, in order to avoid this scenario, it is vital that labor legislation promotes employability and empowers adaptation to the changing economic and technological environment.
Successful economies will be at the frontier, innovating, transforming and seeking high rents. Work culture in this context assimilates high investment and mobility.
High rates of unemployment conspire against these values and generate a hostile climate the crucial notion of striving.
Avoiding legislations that privilege the ones already employed and the status-quo, is vital to the changing dynamism and the effort culture.
Maybe the most negative action in this context stems from taxation which uses income from labor as its basis, rendering artificially expensive employment. This promotes an informal economy, state alms and non-market activities. At the same time it impedes accumulation and technical improvements which are mostly concentrated on modern market sectors that are punished by differentiated taxing. Such procedures induce activities, informal and outside the market, which by character activities contributing to a lower global productivity.
The logic of a free society which nests incentives, implies the concentration of taxes at the level of citizens, particularly what is extracted from economic activities and accumulation (consumption) which permits the maximum correspondence between tax burden and resources provided by the State.
Not discouraging the use of labor with taxes is probably the cleverest criteria for mobilizing the defense of a society, with work ethics and low vulnerability to communication communicative and psychological actions of clientelistic and demagogic systems.
The work ethic framework of reference is resumed in the notion that prosperity is due to the effort provided, creativity, saving and responsibility. Each one is free and the owner of his actions – not a byproduct of a gracious concession or of a favor of the ones in power.
A free and equal citizen’s society is organized on the basis of the nomination of candidates and exercises power lies in the citizens; in an institutional arrangement that limits rulers and ensures alternation. These societies of the free and equal will serve as a counterbalance, so the prevailing state’s vision that includes power division, mutual control, publicity of its actions and transparency of its administration, continues.
Real power is constituted both of public opinion and the citizen’s decisions, which form a large middle class, dissociated from any guild, religion, geographical location, race or economic power. This is why there is no seizure of public decisions, budget or regulations.
Everyone is equal before the law and enjoys the same power inside the political system by its individual and secret vote.
The absence of corporate characteristics of power naturally shifts the weight of decision-making to civil society and local governments, where it is easier for the citizens of flesh and bone to engage spontaneously and control its representatives and their ethical behavior.
Freedom requires personal security in order to be executed. Without it, all rights are lost and fear replaces innovation and social interaction. This, in turn, implies a clear attitude of the ruling elite in terms of felony, violence and the not-knowing of the Other’s rights. From small incidences to organized crime lies a continuum of judging attitudes and critics to confront them. Without such there is a rapid escalade of a substitute social organization which is theft, violence and gangsterism with its own consequences. This argument takes its force when facing the expansion of organized crime and the fear of failing states.
The key to success is recognizing that the monopoly of force in a state with authentic rule of law is inalienable and that there cannot exists such a thing as sanctuaries for criminal activity of any kind, anywhere in a territory controlled by any state. In this context, international cooperation, control of trafficking in arms and persons as well as money laundering and person trafficking constitutes a fundamental reference. Joint action the international community is vital given the nature and dimensions of criminal activities. In such circumstances it is important to not distract State force in controlling decisions of personal nature but to concentrate on preventing action and the weakening of criminal networks.
Market economy is based on consensual and voluntary exchange, mutually beneficial and peaceful. There is no violence or brutality in coexistence. There is no hatred because the complementary character of the exchange is understood.
The onerous and commercial context is the least violent of human institutions and possibly also the least discriminatory in terms of exchange. There is only the need for economic utility, not the subordination of another.
The enjoyment of property and commercial exchange is a right, not a privilege granted by authority, one that is enjoyed at the same time as its products are protected. This conceptualization is antagonistic to the alternative model of an immobile culture, of vassalage and clientelism where citizens are assaulted with prohibitions of commerce; travel outside its communities, or of access to foreign currency.
This alternative model to a free society implies the land easement proper of the authoritarian culture and of the anachronism of terrifying regimes because of the use of violence and intimidation.
One crucial and particular kind of freedom in this context is the “voting with one’s feet” concept by choosing residency, negating passports or internal and external permissions that nullify mobilization.
As we have already mentioned, one decisive and very specific form of control in an authoritarian regime is the ability to converse local currency. This kind of restriction is highly functional for restricting the regime of personal freedom. Correlated with the lack of currency conversion is inflation, protectionism and even the extreme of prohibiting the free exit and entry of one’s place of residence.
One important key to defining a political regime comes with its first transition of power. If it cannot be peaceful, left to the free choice of wills and dissociated from alternation, first all political liberties and later the economic ones will be compromised; violating that indispensable structure of personal autonomy of all citizens.
In a free society piece is a vocation which promotes development and prosperity, creating a suitable context to resolve controversies that emerges inevitably in social encounters.
A peaceful transition of power with fair and non violent elections is one of the main attributes of a free society. This aspect should not be underestimated by personal freedom.
Key values for preserving institutions that promote freedom are the one involved in the availability and validity of a free press. This is the same decisive bastion which authoritarian forces seek to destroy.
It must be pointed out that in societies where there is a profound participation of the State in the economy; it becomes decisive that its publicity is not used to tame public opinion, the press or for financing friendly press. The latter argument has become of more importance in Latin America where the assault to independent journalism has not only intimidated critics but has created a pattern that chokes public spaces meant for social reflection, and instead creates a dialectic in which opposition becomes an enemy buried in a pile of insults and disqualifications, making public information impossible to access.
Besides, a law needs the distribution of official publicity is perhaps the healthiest mechanism for the sustenance of a democratic society.
A terrible vice that authoritarian regimes have developed quite recently in the region is that of financing with public resources, highly expensive electoral campaigns which make competition almost impossible. Is not only about money and publicity, is the whole State apparatus used in a paternalistic way where there is no distinction between State, government, official party and candidates. This, of course, is not compatible with a free society and these excesses must be repudiated as a moral bevel that is crucial to leave behind, with its hindrances of corruption, purchase of will and destruction of trust, among others.
Section II. Latin American experiences
Based on the exposition above one can visualize that in Latin America there are two clear tendencies in terms of rules that relate to institutions, economic and social inclusion; institutions, of rule of law and respect for the Constitution. Both tendencies have antagonistic components and highly antithetic destinations the direction to which they are headed to are highly antithetic. Generalizing, we can categorize all countries in the region in one of those two tendencies in a very general way.
One the one side, we have the tendency of those countries with a growing respect for property rights, rule of law, promotion of economic entrepreneurship and a highly favorable business environment; but, above all, and most important for our research, lies the respect and strict fulfillment of a legal and institutional framework. The combination of these conditions leads to a steady human and economic development with an improving quality of life.
This is not to say that these countries are absolutely consolidated as free and prosper societies that are respectful of the law. However, we can say that they are undeniable in the path with the same characteristics as those most advanced societies in the free world.
Among these countries, the most paradigmatic case since the advent of democracy, which has taught a lesson to all of our countries and to the whole world about the importance of the respect towards institutions, laws and market economy, of the integrity of government administrators, emphasizing the promotion of social cohesion, ist that of Chile. Besides Chile there are also Mexico, Brazil, Colombia, Uruguay and the majority of Central America.
In all of these cases citizens as well as international investors find consistency in the rules of the game, stability in public finances, low levels of inflation, and a highly predictable monetary policy from its Central Banks; all of which creates incentives for a virtuous cycle for more international investments in both goods and services, in order to establish a growing flow of foreign direct investment. This is the basis of economic progress, of an increasing quality of life, the eradication of poverty, fallibility towards a greater equality which is genuinely sustainable.
In terms of politics and institution, the countries grouped together previously are on their way to gradually eliminate the corporate and clientelistic systems from the anachronistic internal structures. Simultaneously, there is a critical and vigorous free press, maturity of the electoral and institutional systems, that allow for a political alternation and the functioning of the checks and balances system.
Unfortunately there is another grouping of states that have been following the path of the so-called Socialism of the 21st century. Here, we perceive a growing loss of prosperity and liberty. These societies have a verifiable and uncontrollable augment of the State´s power, expressed by a very high public deficit, a disproportional increase of bureaucracy, in a growing and excessive regulation of a particular nature, which inhibits competition, social creativity, personal autonomy, and allows the rooting of clientelistic sectors. In this category, the outstanding case is Venezuela, but it also includes Bolivia, Ecuador, Nicaragua and Argentina, without leaving out the most dramatic case for being of such a totalitarian nature: the Republic of Cuba.
Within this group of countries we can observe the growing signs of populism, marked by unsustainable subsidies, growing inflation, the creation and enlargement of state monopolies which take the place of civil society, discouraging innovation, modernization and the spirit of entrepreneurship; while there is a promotion of strict controls with swift changes, mostly subjective, that imply a difficult access to foreign currency but that also entail an impossibility to travel abroad, building a prison-like country. There is no need to state that international exchange is highly regulated, violating all international agreements, that the private sector is confiscated and the general population frightened for the menace of State’s use of force, often accompanied with an irrational issuance of national currency and an arbitrary and persecutory management of taxation policy.
In terms of politics, in these countries the main attack is made to the freedom of press and the growing menace towards independent media. Here, the governments of the Socialism of the 21st century use the mass media as the official party’s political weapon and resource for promoting, arranging and exalting government actions and hiding the truth by distributing official propaganda.
In this type of societies, especially in the most radical ones, there is no such thing as equality before the law. Opposition is considered second class citizenry; division of powers has disappeared, diluting the respect for court sentences when there is discrepancy with government policies of the official party, like the recent case in Argentina has shown.
Once more Latin America, like the rest of the world, has the opportunity and the duty to fight vigorously for the defense of freedom. There is no more decisive contribution to the welfare of social cohesion and economic progress than that of protecting the institutions, and the rule of law which constitutes the framework in which all societies that are free, socially cohesive and respectful of human rights are build. This is our commitment, our behavior and our path.
