How to make money accumulation costly?

Looking at the economic history of the last Century is easy to recognize a cyclical pattern in which interventionists and free market policies have followed each other. The first half of the 20th century saw the collapse of the first wave of globalization (1870-1914) due to the abandonment of the Gold Standard during the World War I and the nationalist sentiment brought by the Great Depression. This was then followed by a focus on policy autonomy and financial stability that became central to the structure of the Keynesian International Economic Regime or the Bretton Woods Regime.

Keynes’ ideas on the need for strong financial regulation and governments controls on capitals and interest rates matched with the ideology emerged after World War II to consolidate the basis for a regime which main objectives were combating unemployment and promoting social welfare. The commitment of currency convertibility for current account payments, the gold-dollar standard, the adjustable peg exchange regime and moreover the acceptance of capital controls were key in shaping the economic golden age of economic growth that lasted from 1950 to 1970.

In 1960 Robert Triffin argued that the gold-dollar standard was inherently instable due to a US inner conflict of interests. According to Triffin, the tying of the regime to the US balance of payments was dangerous in the sense that the US had incentives to over print dollars in order to finance its deficit. Furthermore, the momentum achieved after the Second World War was over by the middle of the 60’s. And as a result of the Vietnam War and a rise in imports, the deficit increase in the US balance of payment precipitated the US abandonment of the “gold-dollar standard” in 1971. The collapse of the “gold-dollar” standard had important consequences for the global economic regime that have lasted until today.

The current Financial Regime has had the particularity of increasing economic instability and vulnerability. Its characteristics (flexible exchange rates, low financial regulation and lack of commitment to the use of capital controls) have undermined the autonomy of national governments to regulate their financial markets and to protect their citizens from the effects of speculative movements of capital. In addition the lack of a self-adjusting mechanism (like the one in the Gold standard) has produced serious problems to the “global balance of payments” that have tend to polarize countries between net debtors and others that are building huge reserves. In particular the devastating experiences of the 90´s in developing countries have highlighted the need for governments to build reserves to protect their currencies and export sectors.

Today history seems to be repeating and the effect of the last 40 years of low financial regulation  is generating a protectionist move from developed and developing countries alike. Due to the liquidity injection in developed economies money is flooding emerging markets appreciating their currencies and affecting the relative prices of their exports.

It was thought that by abandoning the gold-dollar standard the world economic growth possibilities would be freed by allowing an increase in money supply and that it was going to be the solution of poverty by making money less scarce. In this context financial liberalization was a mechanism trough which that extra money supply would reach poor countries. However as Keynes found almost a century ago financial markets are far from being perfect, especially since they are governed by “animal spirits”.

Keynes analysis of the financial markets propensity to crises has been clearly undervalued in the light of the increasing political and economic power of global financial corporations. Today’s economic mess should be enough to make clear that government regulation at the national and supranational level is needed to control the speculative uses of capital and the negative effects of capital flows for the real economy. It is essential to recover the national monetary autonomy of every country and the power of governments to protect their citizens from economic shocks.

While there is clearly a strong need to make money accumulation costly, the current financial systems is on the contrary producing incentives for governments to build huge reserves. The problem is that along with money accumulation there has been an accumulation of power that is indeed complicating the global cooperation prospectus.

 Only by making money accumulation costly we can reverse the income and power polarization that has been increasing in the last three decades and only then we can hope to solve the economic problems of our times.

La Revolución vino del Norte

Hace poco tuve la oportunidad de participar en una serie de conferencias organizadas por la sociedad de estudiantes mexicanos en la Universidad de Cambridge con motivo del aniversario de la Revolución. La idea era hacer un análisis del impacto de la Revolución en el México contemporáneo. Los conferencistas ambos ingleses autoproclamados “mexicanistas” , Prof. George Philip (LSE) y Prof. Laurence Whitehead (Oxford) , hicieron un recuento de las transformaciones que ha sufrido México a 100 años de su revolución incluyendo interesantes anécdotas políticas de su años como investigadores en el país.

Dos cosas llamaron mi antención. Por un lado, el poco legado que queda hoy de la revolución y lo poco revolucionario que es dicho legado. En pocas palabaras la revolución dio la pauta para el inicio de la epoca PRIísta, que más alla del coorporativismo no generó las bases para lograr una mejor redistribución de la riqueza o el poder sino todo lo contrario. En cuanto al sufragio efectivo no re-elección 70 años de PRIísmo no son exactamente prueba de dicho legado y tristemente a pesar de la alternancia a nivel federal la democracia estatal y municipal deja mucho que desear hasta la fecha. Así que aparte de la abundancia de la palabra "revolución" en los nombres de los partidos políticos del México contemporáneo, la revolución fracaso en lograr el objetivo que llevó a las personas comúnes a apoyar la lucha: el tener más y mejores oportunidades de vida.

En segunda lugar, creo que es interesante analizar las circunstancias de 1910 que detonaron el apoyo nacional a la lucha revolucionaria. Si bien es cierto que después de 34 años de Porfiriato se habían acentuado muchos problemas políticos y sociales la realidad es que si nos vamos a las cifras las cosas no han mejorado mucho. Hoy en día siguen  habiendo 50 millones de mexicanos (47% de la población) en pobreza (Banco Mundial) y la distribucion del ingreso sigue deteriorándose . De hecho de acuerdo a informacion de la jornada (http://www.jornada.unam.mx/2010/04/22/index.php?article=002n1pol&section=politica) al mismo tiempo que la crisis financiera mundial inciada en el 2008 ha producido un aumento de 5 millones de pobres en México (la mitad de los nuevos pobres en Latinoamerica); en los ultimos 4 años la proporción del ingreso nacional dirigida al top 10% de la poblacion creció de 35.4% a 41.3% . 

Que era diferente en el México de 1910 que llevó a la gente del país a luchar? Que ha cambiado que a pesar de la crisis financiera de 1994, el movimiento Zapatista, la desintegración de familias por la migración y la situación de guerra que se vive hoy en día en muchas ciudades de nuestro país la gente no se ha revelado contra el gobierno y sus políticas? Y no me estoy refiriendo a una lucha armada generalizada sino simplemente a una forma organizada de presión civil para que haya una revisión de las políticas y los políticos.

Cuando le hice esta pregunta al Prof. Philip su respuesta fue: “la revolucion vino del norte”. Y dada la distribución de la riqueza en nuestro país y la fuerte correlación entre la región y el nivel de desarrollo; en otras palabra la respuesta del Profesor significa la revolución vino de la clase influyente, de hecho Madero era nieto de un exgobernador de Coahuila e hijo de un hacendado.Y de hecho esto es lo mismo que ocurrió en la Guerra de Independencia donde los hijos de españoles fueron los primeros en revelarse. 

Podemos decir entonces que el éxito del modelo neoliberal, que ha permanecido en nuestro país casi 3 décadas a pesar de sus pobres resultados y de la alternancia del poder, ha sido el mantener a la clase influyente contenta?  Aún más interesante es pensar en esto a la luz del fenómeno que esta generando la "Guerra del Narco" en ciudades prósperas como Monterrey; en donde los empresarios se están organizando para comabatir activamente la violencia que amenaza no sólo con modificar su forma de vida, como ya lo esta haciendo, sino con dañar los cimientos de sus empresas muchas de ellas con presencia a nivel mundial. A la vanguardia del moviento empresarial se encuentra el Ing. Lorenzo Zambrano que ha declarado públicamente su opinión  en cuanto al problema que vive Monterrey y sus intenciones de ayudar a solucionar dichos problemas(http://online.wsj.com/article/SB10001424052748703673604575550841760426492.html).

Mientras no me queda duda que Monterrey tiene el potencial para sobrepasar esta etapa y dar ejemplo al resto del país, lo que queda en discución es el interés de los líderes regios en lo que suceda en el resto de México y los obstáculos que esto puede ocasionar para una generalización del "Modelo Monterrey".  De hecho, la polarización de nuestro país es tan grave que ni siquiera es claro si  los esfuerzos que se hagan en la sultana del norte puedan copiarse en otras ciudades del mismo Nuevo León.

Y es aquí cuando cobra relevancia de nuevo el problema de la desigualdad claramente reflejada en la desconección total entre las diferentes clases, regiones y ciudades de nuestro país. Pero no debemos olvidar que la delincuencia es exactamente un reflejo de dicha desigualdad. Y que si seguimos postergando la discusión de las reformas redistributivas que necesita nuestro país las actividades ilegales y la delincuencia seguirán siendo substitutos de dichas políticas de redistribución.

The “Exit Option” and the lack of Mandela-style Leadership in Latin America

A few months ago I watched the movie Invictus. It was my first approach to the life and legacy of Nelson Mandela. I was so impressed that I went on to read more about him.  I learnt he was part of the African elite before the British arrived. In fact he was educated to be an advisor for the regent of his community. When the British arrived he saw his prospects for an easy life destroyed and as a lawyer he went on to work for a white solicitors' firm. Later on he started to fight against the injustice of the regime and was put in jail for twenty seven years.

What strikes me the most about him is his intelligence to put at the center of his government the integration between blacks and whites. Despite the injustice against him, he lead a participatory an inclusive government. He understood that South Africa was made of blacks and whites and the only way to achieve peace and prosperity was to try to integrate both societies.

This type of leadership is significantly different from that of Latin America in the XX and XXI centuries. Instead of integration, politics have been based on social and economic polarization and politicians have used inequality and class differences as an electoral weapon. As a result, the economic policies of the last four decades haven’t achieved a fair representation of the different economic and social sectors. Thus, alienating different groups and ways of life. We can even argue that political polarization might be one of the mechanisms in which economic and social disparities feed themselves producing a vicious cycle that ends up being very difficult to escape.

In the Mandela example- as in many other successful revolutionary movements- the leader comes from a sort of middle class. He is well educated and understands the struggle and incentives of the different sectors of the population. This gives him the ability to understand the real harm posed by social disintegration and the limitations of top-down  policies.

Thinking about this… I can’t help but wonder: Has inequality foster the sector and class-specific politics that we are seeing now in Latin America? Can a Hugo Chavez succeed in a more equalitarian society? And more important, why is Latin America lacking of leaders that are willing to reconcile the different realities created by inequality? Does Democracy have a role in this?

One of my hypothesis regarding the “increasing returns of inequality” (i.e. the power of inequality to perpetuate itself) is that once the gap between the social classes reach a certain threshold the differences justify a “class pride”, an inter-class sentiment that ends up with the upper-class completely disenfranchised from the low class’ reality, often resulting in violent reactions against the upper class. Moreover, when a social group feels that its voice will never be heard, it abandons the “Voice Option” to take the “Exit Option” (Albert O. Hirschman, 1970). 

For instance, in Latin America during the 80’s and early 90’s some groups were still trying to use the “voice option” - a good example of this is the Chiapas Guerrilla. However, by the mid 90’s the excluded sectors opted for the “Exit Option” reflected in: the massive migration to the US; the increase in kidnapping crimes (one of the most cruel ways to show that the lower class feels entitled to get something out of the upper class); and, in the proliferation of informal and criminal activities mainly drug trafficking.

Two questions remain: Is it too late to convince Latin America that the Voice option is still a viable one? Can a Mandela style leadership break the vicious cycle of inequality and create a more integrated society? I would like to think the social disintegration in our countries is not at the extremist level of that of the Apartheid …Who knows we might still have just enough time left.

Inequality, Neoliberalists and Why Mexico Shouldn´t be Afraid of Participating in the Currency War

The Mexican economic crisis of 1994-95 has been considered the first financial crisis of the XXI Century because it was the first one caused by the speculative nature of the International Financial Market. Today developing countries find themselves again in a similar scenario. International capitals are flooding the emerging markets in search of high returns that can't be found now in the indebted and slow growing developed economies.

Developing countries are one more time in a crossroad. Should they keep believing in the financial market and its invisible hand? Should they maintain inflation as their main monetary objective? Can they successfully hold the value of their currencies by intervening the market? Should they use capital controls instead?

Augusto de la Torre, World Bank's Chief Economist for LatAm., has suggested that governments in the region should fight the inflation pressures from the appreciation of their currencies by reducing expenditure (Bloomberg Oct.11, 2010). But, can countries with high percentage of population living in extreme poverty afford a reduction in expenditure? Can Governments - like the Mexican one- fighting a war against drug trafficking reduce public expenditure? Are there any other options?

While different countries are responding to the situation in different ways and using different instruments, is striking to see how the East Asian economies are willing to intervene the currency market and implement capital controls - India, China, Thailand, South Korea, Japan all have expressed their willingness to intervene the market to protect their currency from harmful "speculative" appreciation – while, on the other hand LatAm. economies (except Brazil) are once again keen on maintaining orthodox policies and letting the market do the rest.

In a liberalized economy with a high percentage of foreign ownership of banks, the reduction in the policy space is challenging in itself.  In this scenario, governments should be willing to use any economic policies that have proved to be successful in maintaining financial and economic stability. This makes me wonder….Why some Latin American  economists are scared of the use of government intervention?  Carsten´s “clarification” in the recent IMF G-20 meeting that the increase in Mexican International Reserves was merely a result of economic fundamentals and Mexico was not going to participate in a “currency war” supports my point.

Maybe I need to remember that the politicians that are leading our economies today are part of the “Debt crises generation”. The majority of them did their PHDs in the US studying under the market fundamentalist wave of the time. Many of them were the initiators of the “remaking” of the Mexican Economy (Lustig, 1998), and saw the macroeconomic stabilization of the last two decades as a personal triumph.  But, what about the deterioration of the income distribution? What about the exclusion of some economic sectors and ways of life? What about the violence and the high social and economic cost of the economic and social disintegration of the last 3 decades?

Maybe it is time to explore the policy options beyond the ones contained in the Washington consensus - that many of our leaders learnt by heart in the 90´s.