Bad luck if you are poor!

Greetings from College Park, Maryland (pronounced Marrilynd! in Australian). It is near Washington (DC) and I have work here (at the UMD) and in the capital for the next 2 days. Weather is hot but we are 189 kms or 2.8 hours from the nearest surf according to Google maps, which is equivalent to being landlocked to me! So no quick surf before work! Losers! I came down here late yesterday (5 hour drive) after a workshop at the Levy Institute jointly hosted with the United Nations Development Program, which was held in upstate New York. No summer up there at the moment but the Catskills Mountains are very beautiful – it is near to Woodstock. Anyway, I left the workshop thinking – bad luck if you are poor!

As a matter of clarification, I presented a formal paper by invitation at the workshop and if you visit the workshop WWW you will not see my formal presentation on Pakistan. This talk was based on research I have been doing under contract with the Asian Development Bank and contained material that was not yet suitable for wider release. I will report on this issue when I return home! There is a related story of the so-called Case of the Missing Report, which I mentioned a few weeks ago that I will also report on in due course.

Further, I was also invited to participate as a panel member in a session entitled:

DIALOGUE (2)—POLICY OPTIONS AND CHALLENGES IN INTRODUCING EGP, ELR

Funding: Costing and sources of financing, impact on internal/external balances

Inflation: Acceptable range and micro-macroeconomic impacts

EGP refers to employment guarantee programs and ELR is employer of last resort, which is a term I do not use but the Americans use it to mean Job Guarantee. They draw an association with the Lender of Last Resort facilities that central banks provide to the banking system which they say makes it clear that the government is finally responsible for the integrity of the system when all else fails. Sure enough. So they then argue ELR means the government is finally responsible for full employment. Fair enough too. But while LLR refers to adding necessary bank reserves, I prefer not to equate humans with bank reserves (numbers in spreadsheets!). I agree that employment is a human right and governments all around the world have to uphold that right without qualification (that is, to reject claims based on financial grounds that they cannot). But the term Job Guarantee is more positive and reflects our human connection to the economy – via a job.

But any rate, the dialogue session was my sort of stuff if anything is!

This blog is about my perceptions of the workshop and the future of employment guarantees in LDCs. My perceptions are not very good and I have pessimism about the latter.

The United Nations Development Program, which according to its WWW site “is the UN’s global development network, an organization advocating for change and connecting countries to knowledge, experience and resources to help people build a better life. We are on the ground in 166 countries, working with them on their own solutions to global and national development challenges. As they develop local capacity, they draw on the people of UNDP and our wide range of partners … UNDP helps developing countries attract and use aid effectively. In all our activities, we encourage the protection of human rights and the empowerment of women.”

So that sounds noble and worthwhile. The workshop participants (all invited) were drawn from right across the UNDP senior officials (seemingly a lot from Latin America) and also were from finance ministries and other government departments from various countries. There was even a senator from Colombia and a former Vice-President of Costa Rica present. One would think that this group would be open to all ideas that would improve their charter outlined above.

Conclusion: they are not! There was an open antagonism to diversity of opinion which astounded me.

The latest World Bank financial crisis update lists the following summary facts and figures (I have deleted some of the points they make for brevity);

  • The global economy is projected to fall by 2.9%, according to latest Bank estimates from June 2009. And world trade is projected to fall by 10%.
  • Developing countries are expected to grow by only 1.2% this year.
  • Growth is expected to revive during 2010, but the poor in many developing countries will continue to hurt because they have less cushion to protect themselves.
  • Private capital flows could drop to $363 billion this year. Many countries will find it difficult to meet external financing needs, estimated at $1 trillion.
  • The overall financing gap this year for developing countries will be between $350 billion to $635 billion.
  • As many as 90 million more people could be trapped in poverty as economic growth slows around the world in 2009, according to Bank forecasts. This is on top of the 130-155 million people pushed into poverty in 2008 because of soaring food and fuel prices.
  • More than 1 billion people could go chronically hungry this year, according to projections. This would reverse gains in fighting malnutrition.
  • Infant mortality is set to soar due to countries’ lower growth rates. Between 1.4 and 2.8 million more babies may die in the next five years, if the crisis persists.
  • Sharply tighter credit conditions and weaker growth are cutting into government revenues and their ability to invest to meet education, health and gender goals, as well as the infrastructure expenditures needed to sustain growth.

These points are related to the analysis in the latest World Bank report – Global Development Finance 2009. While most of the macroeconomic analysis in conceptual terms is forgettable (being wedded to the old gold standard thinking about government budgets) – for example, the last of the dot points above – the hard data is very scary. The Report says that:

… even with the stabilization of financial markets in many developed economies, unemployment and under-utilization of capacity continue to rise, putting downward pressure on the global economy.

The Bank’s previous forecasted decline in economic growth in 2009 for the global economy was 1.7 per cent. This has been revised to 2.9 per cent – almost twice as bad! While this is bad for the advanced economies it is a disaster for most developing countries who strongly rely, as a result of flawed development strategies pushed by the IMF, World Bank and other agencies, on exports and remittances for their growth.

The head of the World Bank said that “Waves of economic pain continue to hurt the developing world’s poor, who have less cushion to protect themselves. There is much more we need to do in the coming months to mobilize resources to ensure that the poor do not pay for a crisis that is not of their making.”

The problem is that with FDI down significantly, the poor countries are then coerced into more borrowing from the World Bank and the IMF and other sources. And you know what that means? Conditions, conditions, conditions! All aimed at reducing the capacity of the government to use what sovereignty it has to promote domestic growth and reduce poverty.

So when I read this type of report I think there is an urgency to reject the failed macroecomic paradigm that has not delivered fiscal frameworks to insulate the LDCs from abject poverty and render them resilient to global fluctuations of the type we are witnessing at present. I also assumed that the UNDP officials would be looking to learn new ways of dealing with the problems they describe in their charter.

Conclusion: I was wrong!

At the UNDP workshop I participated at, while the main focus of the two days was employment guarantees (which is something to be happy about), there was still a lot of talk about fiscal space. Any of the presentations that dealt with macroeconomics (other than my contribution and the contribution of fellow modern money traveller Jan Kregel) introduced the concept of fiscal space as if it mattered.

The UNDP appears to be obsessed with the concept and it conditions the way they think about macroeconomics and constrains the way they construct the development agenda. In my view, the constraints this erroneous thinking places on their policy vision is terminal for the poor. Countries will never be able to create the requisite number of jobs necessary to fully employ the available labour while they are being advised by “experts” who operate in the mainstream macroeconomic paradigm. Anyway, I am getting ahead of myself.

During the dialogue session (noted above), there was a groundswell of resentment against modern monetary theory. One audience member actually said that by introducing diversity of macroeconomic thinking into the workshop I (and Jan) had done a “dis-service” (quote) to the proceedings and that any discussion of employment guarantees should be de-coupled from the ideological debate about macroeconomic theory. He was warmly clapped by the audience (with notable exceptions).

A little research however shows that the UNDP constructs its development objectives (including job creation) within a macroeconomic blanket. In Making fiscal policy working for the poor, which is a UNDP publication published in 2004, we read:

Macroeconomic policies represent a key ‘entry point’ for the UNDP’s activities to foster human development. In order to present programme countries with viable macro policy options, UNDP seeks to support access to policy advice that presents a menu of feasible options and alternative analyses.

So a link between macroeconomic theory and poverty alleviation goals is undeniable. So the complaint from the workshop was not about macroeconomics being discussed. The frightening realisation is that the complaint was about diversity of opinion. I will comment more about this in a moment.

First, a brief tour into how these organisations (IMF, UNDP) think about fiscal space. Here is what the IMF defines it to be. Fiscal space is:

… room in a government´s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability – making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.

The UNDP has a special WWW Page devoted to fiscal space. This document – Primer: Fiscal Space for the MDGs – is particularly interesting as it juxtaposes the IMF approach with the approach taken by the UNDP. Perceptive readers will realise quickly that at the heart of the matter there is not much difference at all between the two. So the “higher moral ground” that the UNDP attempts to claim is illusory.

The UNDP definition (taken from their Primer) of fiscal space:

… is the financing that is available to government as a result of concrete policy actions for enhancing resource mobilization, and the reforms necessary to secure the enabling governance, institutional and economic environment for these policy actions to be effective, for a specified set of development objectives.

Spot the identical starting point. They both assume that the government has the same constraints that restricted governments during the gold standard when currencies were convertible and exchange rates were fixed. These definitions, despite there subtle differences, could have been written in 1950.

In a fiat monetary system, these concepts of fiscal space are seriously deficient and completely ignore the main points which are:

  • a sovereign government is not revenue-constrained which means that fiscal space cannot be defined in financial terms.
  • the capacity of the sovereign goverment to mobilise resources depends only on the real resources available to the nation.

I was astounded that the UNDP officials seemed to oblivious to this fundamental point. I can accept that many nations struggle with currency sovereignty. Those that have ceded their sovereignty by entering currency zones; by dollarising their currencies; by running currency boards; and similar arrangements clearly are not sovereign and face the same constraints that a country suffered during the gold standard era. My advice to them would be to implement a plan to remove themselves from these arrangements as quickly as possible. The responsible conduct of the IMF and other agencies would be to help them achieve currency sovereignty as soon as possible. Yeh right, as if!

By the way, these nations are no different in this respect to Germany or France who are constrained by their membership of the Eurozone.

But there are hundreds of developing countries that do have currency sovereignty which means they can enforce tax liabilities in the currency that the government issues. It doesn’t matter if other currencies are also in use in those countries, which is common. For example, the USD will often be in use in a LDC alongside the local currency and be preferred by residents in their trading activities. But, typically, the residents still have to get local currency to pay their taxes. That means the government of issue has the capacity to spend in that currency.

So the point is that as long as there are real resources available for use in a LDC, the government can purchase them using its currency power. Last time I looked at the data, millions of people are unemployed across the LDCs. They are real resources which have no “market demand” for their services. The government in each country could easily purchase these services with the local currency without placing pressure on labour costs in the country.

But then the claim is that these people will eat more now they have a wage and many LDCs import food. So this will blow the current account out and cause inflation. All open economies are susceptible to balance of payments fluctuations but of-course these were terminal during the gold standard for deficit countries because they meant the government had to permanently keep the domestic economy is a depressed state to keep the imports down.

For a flexible exchange rate economy, the exchange rate does the adjustment. Is there evidence that budget deficits create catastrophic exchange rate depreciations in flexible exchange rate countries? None at all. There is no clear relationship in the research literature that has been established. If you are worried that rising net spending will push up imports then this worry would apply to any spending that underpins growth including private investment spending. The latter in fact will probably be more “import intensive” because most LDCs import capital.

Indeed, well targetted government spending can create domestic activity which replaces imports. For example, Job Guarantee workers could start making things that the nation would normally import including processed food products.

Moreover, a fully employed economy with skill development structure embedded in the employment guarantee are likely to attract FDI in search of productive labour. So while the current account might move into deficit as the economy grows (which is good because it means the nation is giving less real resources away in return for real imports from abroad) the capital account would move into surplus. The overall net effect is not clear and a surplus is as likely as a deficit.

Finally, even if ultimately the higher growth is consistent with a lower exchange rate this is not something that we should worry about. Lower currency parities stimulate local employment (via the terms of trade effect) and tend to damage the middle and higher classes more than the poorer groups because luxury imported goods (ski holidays, BMW cars) become more expensive.

These exchange rate movements will tend to be once off adjustments anyway to the higher growth path and need not be a source of on-going inflationary pressure.

Where imported food dependence exists – then the role of the international agencies should be to buy the local currency to ensure the exchange rate does not price the poor out of food. This is a simple solution which is preferable to to forcing these nations to run austerity campaigns just to keep their exchange rate higher.

It was also claimed that the (implied) budget deficits would be inflationary. Why? First, why is net government spending inflationary whereas private investment spending not? There is no answer other than an ideological disposition against public spending. Second, we always have to go back to why inflation occurs. If nominal spending exceeds the real capacity of the economy to respond then you get inflation if the growth of excess nominal spending is continuous.

Are these UNDP officials trying to say that these economies have no spare real resources available? If that is the case, then what do they think they are doing anyway other than taking a handsome salary? If there are no real resources available then further non-inflationary growth is impossible and the poverty can only be addressed by taking real resources of those who currently have them and giving them to the poor. That is, redistribution via taxation.

That has nothing to do with financial constraints on government spending nor indicates that taxation finances that spending. Neither are true. What it indicates is that any spending can come up against a real resource constraint and the only non-inflationary solution is to redistribute who has access to those real resources. So taxation can play this role by reducing the capacity of some to spend (access real resources) and providing more access (via government spending) to those previously deprived. All of which would be occuring at full employment.

The reality is that there are many idle resources in LDCs – land, people and materials – that can be bought by government and mobilised to reduce poverty without causing inflation. Immediately assuming that budget deficits will be inflationary is just a neo-liberal strategy to limit the relative size of the government in the economy.

What about the claim that introducing modern monetary theory into a public policy discussion is ideological? Well from my perspective the claim just reflects the level of ignorance that is out there among leading officials in international organisations. In fact, the understandings of a fiat monetary system that I write about are not ideological in the sense of a reflection of my value system.

It is a fact that the gold standard ended and was replaced by the fiat monetary system which has particular technical features that I write about in this blog and my academic work. These features are not a matter of my opinion. They are not a reflection of my value system. They define how the monetary system operates and the space the government has as the monopoly currency issuer in the system.

Where ideology comes in is when I start arguing for particular types of government intervention. The goal of full employment is an ideological goal. The fact that the sovereign government can always purchase unwanted labour using its spending capacity is not an ideological statement.

So it is obvious that using the “ideological” attack is a convenient way to avoid thinking about the conceptual issues being introduced into the discussion. The fact is that the way I teach and think about macroeconomics is a major challenge to the orthodox position held by these international agencies, which they use to maintain power over the disadvantaged they are meant to be serving.

There was also an attack – somewhat more subtle than the one I have just mentioned – that went something like – you are an academic while we are all operating on the ground and interacting each day with governments and real problems. So buster what the hell would you know about anything? This is the ivory tower ignorance accusation that often comes up when dealing with policy makers.

My response was that there are different roles to play in the public debate. Those who study then go into international institutions to manage policy implementation tend to take the conceptual frameworks they were exposed to into these organisations and then operate within the overall constraints set by those organisations. They adopt, in my view, a highly constrained, bureaucratic way of reasoning and do not question the frameworks they operate in (formally that is).

As a research academic I go on learning every day about the mechanics of the systems that I study. I am not constrained by the ideology of the organisation that employs me. I can say what I like and write what I like. My role is to continually challenge the public debate and to offer insights that might allow that debate to function more transparently and deliver options that will actually make a difference (depending on what the policy aims are). In that sense, my role is vital for the policy makers – to provide them with constant scrutiny.

The problem, of-course, is that the ideological hold that the mainstream economics approach has on the applied profession is so strong and so pervasive, that the practitioners actively eschew this scrutiny. Neo-liberalism is a particularly pernicious thought-regime in that it hates diversity of opinion. I could write a book about this (and will eventually) but it is well documented how slippery the mainstream paradigm is when it comes to empirical validation. Most of the fundamental propositions have no empirical content at all and therefore are religious statements. Joan Robinson once said that orthodox economics was a branch of theology – “it is all a matter of faith”. She also said that you had to differentiate the capacity of economic analysis to produce objective knowledge and the theological branch that is designed to perpetuate the ruling ideology and is used as “an instrument of social control”.

The Anarchists FAQ series What are the myths of capitalist economics? is definitely helpful in this regard, if not just to steer you elsewhere. This distinction that Joan Robinson made is consistent with my view that outlining the technical functions of the monetary system is not ideological. What you do with that understanding is!

So the first thing that a rejection of modern monetary theory ignores is the basic one: the reason there is mass unemployment in LDCs is the same as there is mass unemployment in advanced economies. There are plenty of jobs to do in both types of economies. There is no shortage of work! The problem is that there is a shortage of paid work. The solution is to fund the work that needs to be done in all economies. If you have idle labour then that means there is not enough employment funding being injected into the spending system.

The government has the capacity to make up these shortfalls in spending where it is sovereign without imposing higher taxes and without recourse to borrowing. As a starting point it should use its sovereign capacity to buy up all the unwanted labour – that is, introduce an unconditional and universal employment guarantee.

The discussion at the Workshop was very constrained when it came to specifying the design elements of the employment guarantees. One senior official said that “these schemes should not be universal or unconditional” … “they should be selective, partial and temporary” (or words to that effect). The point is that they are so obsessed with their erroneous notion of “fiscal room” that they fail to understand the way in which an employment guarantee is part of an overall macroeconomic framework that provides full employment and price stability.

Their approaches may get some limited international funding to create a few jobs here and there. Should we be happy about that? Well 1 job is better than none. But in the LDCs millions of jobs have to be created. In South Africa alone they need 6 or 7 million jobs.

In this context, the problem is a macroeconomic one and the debate has to come to terms with that. The only way that these agencies are going to be able to successfully create enough jobs is for them to abandon these nonsensical neo liberal concepts of “fiscal space” and come to terms with the fact that most countries do have sovereign currencies and that those that do not should be encouraged and aided to move in that direction.

Once you come to terms with that then you can “think big” and work out structures that are capable of supporting the creation and adminstration of millions of public jobs. Then we might get some distance down the road to fighting poverty.

So while the UNDP and similar agencies are tightly controlled by a neo-liberal ideology and a refusal to consider diversity of opinion the poor will remain poor. Any programs they introduce within this constrained paradigm will be so partial that they will only skate over the surface of the problem.

These very well-paid officials from the international organisations can attend all the conferences that they like and eat and drink sumptuously while in attendance. They can spend their time at these events constantly scanning their advanced communication devices and dress themselves in fine suits and accessories.

But until they can get their heads into a space where they tolerate views that are not currently acceptable to their organisations and actually start learning new theories and concepts – then as the title of this blog suggests … bad luck if you are poor!

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    6 Responses to Bad luck if you are poor!

    1. Ramanan says:

      Pardon my ignorance of the Euro – how does it work ? After reading your blogs and your modern monetary theories it seems to me that these countries are better off with their own currencies and allow the exchange rates to move freely. I guess that is what you are saying when you said “By the way, these nations are no different in this respect to Germany or France who are constrained by their membership of the Eurozone.” in this blog entry. By moving to the Euro, they have taken a backward step and the governments of the Eurozone have to behave very different from the US and Australian governments are have to face questions of solvency. Is my understanding correct ?

    2. bill says:

      dear Ramanan

      I have written about in several blogs. This link will bring up the relevant references – http://bilbo.economicoutlook.net/blog/?s=eurozone. It is definitely the case that my moving to the Euro without coordinating the fiscal and monetary responsibilities the governments have limited their fiscal capacity and entrenched unnecessary unemployment. They would be better off centralising the fiscal powers and abandoning the SGP or abandoning the whole arrangement.

      best wishes
      bill

    3. Ramanan says:

      Thanks bill. I searched for it before you wrote your comment and read a bit and understand better. I would imagine that the government’s cheque will never bounce in the Eurozone but can cause political issues and unless they centralize their fiscal policy, there will be so much political pressure to balance budgets and keep the deficit to minimal levels and hence the whole arrangement is shaky.

    4. James Davies says:

      Hi Bill,

      I certainly agree with you on the Job Guarantee front, however, what about things like free healthcare? Alhough full employment is one way to measure if the economy is running at capacity can we use other tests?

    5. Scott Fullwiler says:

      Excellent (dare I say brilliant?) post Bill, if more than a little depressing. I’m sure you and Jan were able to remain composed far better than I would have if I were the one sitting there when the statement was made . . . it appears now that describing the details of monetary operations and related accounting identities is considered by significant numbers of influential people to be “ideological.” Simply breathtaking!

    6. bill says:

      Dear Scott

      Flattery will get you everywhere!!

      It was extremely depressing facing the reality that influential people with progressive spirits would be so blinkered not to set that the main game has to be the macroeconomics debate.

      When the guy said that we were just pumping out a particular macroeconomic ideology – it was a moment of disbelief for me.

      There is a long way to go!

      best wishes
      bill

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