5 August 2015
Investment, Economic Development and ALBA

The U.N.'s Economic Commission for Latin America and the Caribbean recently published their Briefing Paper “Challenges in boosting the investment cycle to reinvigorate growth.” The outlook in most of the region is for low growth, lower consumption and lower investment. Overall, ECLAC expects the economy of Latin America and the Caribbean to grow by around only 0.5 percent, about half the meagre 1.1 percent growth of 2014. Mexico and Central America should grow by 2.7 percent and the Caribbean region by 1.7 percent. South America's economy is expected to contract by 0.4 percent.

Investment, Economic Development and ALBA

The causes for this economic slowdown seem to be mainly external factors, including relative stagnation in developed economies and declining growth in China and other countries. ECLAC points out that volumes of global trade increased very little in 2014 and may be even worse in 2015. That decline in volume has been compounded by lower commodity prices. In the second half of 2014 metal prices dropped 41 percent and prices for agricultural products dropped 29 percent.

Overall energy prices fell by 52 percent, with oil prices falling as much as 60% over that period. Despite benefits for some countries, lower prices, coupled with lower trade volumes, have tended to widen balance of trade deficits. This in turn increases the importance of ready access to financial resources to fund those deficits. ECLAC notes that inflation and unemployment have remained stable with real wages slowly rising. But ECLAC expresses concerned over declining consumption and investment stating “The capacity of the region’s countries to accelerate economic growth is contingent on the space available for the adoption of counter-cyclical policies, especially with a view to stimulating investment, which will be critically important for softening the impacts of the current external shock and preventing severe consequences for economies in the medium and long term.”

ECLAC's theoretical positions support the arguments of progressive mainstream economists against the insanely destructive austerity policies applied by the authorities of the European Union. Indirectly, they also question the usefulness of the U.S. authorities' preference for extreme monetary policy interventions. For example, ECLAC states, “it is perfectly possible to safeguard the fiscal space (or maintain solvency) if public capital spending favors growth and thus generates future tax benefits. In other words, well managed public spending can help generate a virtuous circle of sustainable growth. Public investment can thus broaden the fiscal space, since it stimulates growth and thus secures future tax revenues. For that reason, it is important to put in place fiscal rules that stimulate investment.”

Albeit in a very limited way, the ECLAC economic team is restating and reclaiming the role of State spending in promoting people's prosperity and well being. Economist Henry C.K.Liu has written extensively about this, noting that dollar hegemony “destroys the ability of sovereign governments beside the U.S. to use sovereign credit to finance the development their domestic economies, and forces them to export to earn dollar reserves to maintain the exchange value of their own currencies … dollar hegemony, the subjugation of all other fiat currencies to the dollar as the key reserve currency, starves non-dollar economies of needed capital by depriving their governments of the power to issue sovereign credit for domestic development.”

If foreign investment and private investment are deficient, the State's fiscal deficit has to compensate. Progressive economists in the United States have long argued that the reason the U.S. economy remains stagnant is for lack of much-needed and massive fiscal stimulus. Thus, in the context of the ECLAC briefing paper on challenges to promoting investment in Latin America and the Caribbean, Liu's observations highlight the crucial importance of Chinese and other foreign investment in liberating the region from dollar hegemony and the current dead hand of Federal Reserve policy on available options for everyone else. Without that investment from overseas, what ECLAC call's the “fiscal space” available to sovereign governments in the region is limited by the threat of speculative attacks in international currency markets on countries who issue sovereign credit for national development in excess of their dollar reserves.

This also makes clearer than ever the vital importance of countries shifting away from dependence on the dollar for international trade and finance by means of currency swaps as Argentina, Brazil and Chile have done with China. Another option is to carry out bilateral trade in countries' own sovereign currencies, as takes place to some degree between Argentina and Brazil. The ALBA countries have begun trading in a common unit of account known as the SUCRE, or Unitary Regional Compensation System. Membership of the Mercosur trading bloc by Bolivia and Venezuela may finally prompt effective operations by the long delayed development funding initiative of the Bank of the South.

ECLAC's paper explicitly focuses on investment rather than consumption, which is the other main factor promoting economic growth. Liu points out, global capitalism has locked majority world countries into low wage under-development. Liu notes “As workers wages are not sufficient to buy the goods they produce, domestic markets fall into underdevelopment and export to high-wage economies is needed to produce profit for companies.” This cues arguments around income and inequality. For example, Thomas Piketty's unlikely best-seller “Capital in the 21st Century” was widely promoted by many economists in North America and Europe because it supports their arguments for redistributive government fiscal policy while leaving orthodox economic theory intact.

The book is marked by the strong contrast between its apparently robust empirical basis and its uncritical acceptance of orthodox neoclassical economics. For example, Piketty unjustly dismisses the relevance of the so called Cambridge capital controversy to his own argument about the rate of return on capital. But even a mainstream economist like James Galbraith comments in relation to Piketty's argument that “the effort to build a theory of physical capital with a technological rate-of-return collapsed long ago, under a withering challenge from critics based in Cambridge, England in the 1950s and 1960s.” That controversy continued in one form or another through the 1960s and 1970s forcing orthodox economists to change the arguments they deployed to support their accounts of how capitalism works.

The presuppositions Piketty starts from show the relevance of what might otherwise be dismissed as ivory tower theorizing. Another fundamental point commentators have made in relation to Piketty's book and its political exploitation in the U.S. is that, while in the United States progressives have highlighted the gap between the 1 percent and the 99 percent, even people on the poverty line in the U.S. are doing very well relative to the global majority. As Andrew Kliman notes, “Even U.S. residents whose incomes are at this country’s poverty line are nonetheless in the top 14 percent of the global income distribution”. Something which renders even more poignant Liu's insights about low wage under-development.

ECLAC's emphasis on investment, rather than consumption, might be construed as implicitly advocating a public sector remedy to a general fall in private capital's profitability so as to prioritize investment rather than consumption as the engine of growth. The paper mentions income redistribution in the obvious context of taxation policy but mainly to explain the limitations of taxation for income redistribution in a Latin American context. ECLAC's economic team pay more attention to the ways fiscal policy might be used to promote private sector investment. That emphasis is interesting because it has a very practical bearing on arguments among radical economists about the causes of the continuing economic crisis in Western capitalist societies and what the policy responses to that crisis should be.

Writers like David Harvey or Sam Gindin and Leo Panitch have argued recently that the causes of the 2008 crisis had to do principally with under-consumption since in the preceding 20 years or so working class and middle class people had come to depend on credit because their incomes were too low. Other writers like Andrew Kliman, Alan Freeman and others argue that a principal underlying cause of the 2008 financial crisis and subsequent recession was the tendency of capitalists' profitability to fall, thus reducing investment demand to levels that eventually provoked the crisis. These theoretical arguments are very relevant to the discussion by ECLAC's team of economists of the economic outlook in Latin America and the Caribbean because they affect policy decisions, for example between orthodox economic tinkering and radical socialist change.

Hardly anything could be more relevant to the ideological conflicts over economic policy in the countries of the Bolivarian Alliance of the Americas (Cuba, Bolivia, Ecuador, Nicaragua and Venezuela and their Caribbean island nation partners) as they battle to reduce poverty. Cuba is the only country in the whole region to have eliminated extreme child malnutrition. Structural poverty in Venezuela has declined constantly ever since the period of opposition sabotage of PDVSA in 2002-2003. Relative poverty in Bolivia fell by 32 percent between 2000 and 2013. In Ecuador, the figure for poverty fell overall by over 10 percent between 2009 and 2012 to 25.5 percent. In Nicaragua, extreme poverty has dropped well below 10 percent.

Absent from the ECLAC report are the destructive economic effects of ruthless US government supported political opposition movements. Relentless opposition sabotage , for example via price-gouging, contraband and hoarding, since 2013 has completely distorted Venezuela's economy, causing perhaps even more damage than the sabotage of 2002-2003. Recent protests in Bolivia and Ecuador have highlighted the way political opposition groups can exploit legitimate government decisions on investment and fiscal policy to disrupt government planning and policy implementation. Cuba is engaged in the extremely complex process of defending its revolutionary system in the context of its changing relationship with the United States.

Against those threats, just as important as economic and political policy in the ALBA countries is the dimension of moral justice and the right to development focused on the human person. What most characterizes Venezuela, Cuba and the other ALBA countries is their commitment to solidarity-based development cooperation and equitable trade. That commitment has very deliberately prioritized public sector investment among its member countries as well as promoting private sector investment by means of complementary trade arrangements and economic democratization.

In most cases, democratizing their countries' economies has brought into productive economic activity tens of thousands of people, the great majority women, who had previously been excluded. That has certainly been the case here in Nicaragua, where most people are optimistic about the country's economic future. ECLAC itself reckons that Nicaragua's economy will grow well above the regional average during 2015, by around 4.8 percent, noting, “In Nicaragua, gross capital formation has remained constant thanks to road-building and social infrastructure projects.” The Chinese backed Inter-oceanic Canal will enhance current infrastructure investment many times over.

The recent BRICS country summits of last July confirmed that new sources of global investment and financial support are opening up. The BRICS New Development Bank and its related Contingency Reserve Fund have joined China's Asian Investment and Infrastructure Bank to make available a total equivalent to over US$300 billion for international development purposes. Those structures may not be immediately relevant to Latin America's most urgent investment problems but they do represent further strategic loosening of Western corporate capitalism's global choke hold on investment and access to finance.

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