For Professor Doctor Ladislau Dowbor, the new coronavirus pandemic made the contradictions in the Latin American economy more obvious. “Deep inequality makes democracy impossible,” says the Brazilian economist.
Pointing at neoliberal governments, in the following interview Doctor Dowbor observes that Latin America is “systemically dysfunctional,” which has caused the region the world’s most severe economic crisis under the new coronavirus, since the disease got to the region in February 2020. Latin America was declared by the World Health Organization (WHO) as the epicenter of the COVID-19 pandemic in May 2020.
“Conservative governments in the region have been closely linked to American interests,” says the author of several books on economics, published in several languages the expert speaks. “This goes far beyond the pandemic impacts,” states the economist.
Discussing ways out of the crisis in this talk, the full professor of Economics at the Catholic University of São Paulo points out six pillars that governments in the region should consider: Basic income, social policies, public employment programs, tax reform, credit regulation, and decentralized management of public money.
“Frequently called indirect salary, these public universal and free access policies are essential, and more efficient when universal and free,” Doctor Dowbor said.
Edu Montesanti: How has Latin America gotten to this tragic economic situation under the new coronavirus pandemic, the world’s most severe crisis during the disease? Many have considered inequality as the main factor. We also have the bitter reality of the region’s low investment in health care and the welfare state in general. So, what could you say about it?
Professor Doctor Ladislau Dowbor: Latin America is the most unequal region in the world, and this has a structural impact on practically all aspects of society. We did have a number of attempts at reducing inequality, in different countries, with particularly important results during the Lula/Dilma governments in Brazil, and the Cuban exception, but overall the traditional elites, allied with the international corporate interests, have reproduced the social divide.
We now have education for the rich and education for the poor, and the same distancing can be found in health services, access to infrastructure, the rich and poor urban territorial divide, and of course with the pandemic: how do you keep distance, stop working, when you have no means of survival, and live in crowded favelas?
How has the pandemic changed, or been aggravated in the region?
The pandemic made the contradictions more obvious. We are facing a convergence of critical trends, with accelerating inequality, ecological disasters, financial chaos, and fragile democracies. The political temperature is changing as well.
New generations that have been to school, a population with access to mass media and overall urbanization have made people much more conscious that they are destitute, that their children will find no space to thrive, and this has led them to vote for demagogues who proclaim to be “against the system”.
In fact, deep inequality makes democracy impossible: political democracy demands basic economic democracy. In Latin America, we not only face critical situations, but we have in great measure lost the governance capacity to face them.
We are systemically dysfunctional. Conservative governments in the region have been closely linked to American interests, and even the successive dictatorial regimes were explained as a necessity to be “market-friendly,” since this would attract foreign capital, and investments, and promote development.
Low salaries, a submissive working-class, free capital movements, light regulation, reduced public sector, low taxes – all this institutional environment was meant to attract development from outside, not to promote endogenous national capacities.
This led to race-to-the-bottom attitudes in different countries, generating subservient policies that simply do not work: foreign capital is investing less, and draining more.
Foreign direct investment (FDI) flows to Latin America plummeted by 45% in 2020 to $88 billion, according to UNCTAD’s World Investment Report 2021, published on 21 June.
“The region suffered the sharpest FDI decline in developing countries. Latin American economies faced a collapse in export demand, falling commodity prices, and the disappearance of tourism, leading to one of the worst contractions in economic activity across the world,” said UNCTAD’s director of investment and enterprise, James Zhan.
The report found that “FDI to South America more than halved to $52 billion, with flows to Brazil and Peru reaching their lowest level in two decades. In Brazil inflows plunged by 62 percent to $25 billion, drained by vanishing investments in oil and gas extraction, energy provision, and financial services.
In Peru, flows crumbled to $1 billion, influenced by one of the worst economic slumps in the world combined with political instability. In the rest of South America, flows were dragged down by the oil price crash in the first part of the year.
In Central America FDI inflows declined by 24% to $33 billion, partly shored up by reinvested earnings in Mexico, where they dipped by only 15% to $29 billion. In Costa Rica, a sudden halt in investment in special economic zones was responsible for most of the decline in FDI inflows to $1.7 billion. Flows to Panama shrank by 86% to less than $1 billion.” Attracting capital is just a dead end: it can only be viable as a complement to sound internal development initiatives. China may have been declared an enemy by the US, but FDI to China grew by 6 percent while falling in other regions. Solid economic internal organization is much more attractive than subservient policies.
This goes far beyond the pandemic impacts. The economic policies by most conservative governments in Latin America, and particularly in Brazil with the conservative coup, did represent the classical neoliberal agenda, but it increased inequality, which in turn led to a very weak internal market.
Productive business needs strong demand to thrive. As workers’ rights were reduced in Brazil as of 2014, with industry working at around 70% of its capacity, an entrepreneur wrote in O Estado de São Paulo newspaper: “It is indeed cheaper to generate employment, but why should I employ if I do not have whom to sell to?”.
How can the region get a way out of this situation?
There is no mystery as to what works for producers: they need people with purchasing capacity to be able to buy their products, and cheap and abundant credit to finance investment. In Brazil, they have neither. Ford moving out of the country was a shock, but only the more visible part.
Another dimension of the failure of the conservative policies is that cheap labor is not a decisive argument anymore. With modern technology, having highly trained employees is more important, and Latin America, which has been lagging in terms of general education and specialized training, is simply not an attractive economic environment anymore.
Latin America is missing the economic train, with outdated policies. The Chicago-trained minister of the economy in Brazil, Paulo Guedes, is an example of this backward view of development.
A sober look at the present trends makes it obvious that we need another Bretton Woods, or a Global Green New Deal. And this means we need a new approach to development in Latin America.
We do have solutions at the country and subcontinental levels. I had worked in several African countries, as a UN economic and social planning adviser, where overall lack of resources was the key issue. Not so in Latin America. If we consider Brazilian GDP, 1.8 trillion dollars, what we produce in goods and services is equivalent to 2,800 dollars a month by a four-member family. With variations in different countries, the essential argument is that our problems are not economic, in the sense of lack of resources, but of social and political organization.
And there is no mystery as to what works. The World Bank called the Brazilian inclusive development experiment from 2003 to 2013 “the golden decade” of the country. More money at the bottom of the social pyramid, with Family Allowance [Bolsa Familia, in Portuguese], rising minimum salary, and access to electricity to so many isolated regions – 149 programs in totality – generated economic and social inclusion, but also stimulated demand, which generated more growth and employment, in a virtual cycle of development.
The dynamic growth during this period, 3.8% per year on average, also generated the corresponding taxes, balancing the budget. This was brought down not because it did not work, but because of political, local, and international interests.
As of 2014, the inclusive policy is brought down, as substituted by the austerity policy that paralyzed the economy. In 2021, Brazil faces the eighth year of economic stagnation.
The central issue is to reorient our economies towards economic and social welfare for the majority of the population. The paths to follow are well known:
Basic income: money directly delivered to families has been radically simplified with virtual currency, we have a number of international experiences, and with the emergency transfers during the pandemic, the procedures have become clear.
Equally important, it was seen that the transfers are not a cost: they stimulate the economy through improved demand. The idiotic prejudice that people will cease working if they have money has also been reduced: people regard the transfers as a “floor” that opens opportunities and stimulating activities.
Social policies: money in the pocket is essential, it allows payment for basics, but at least one-third of family welfare depends on access to collective consumption: you need security, but you do not buy police, and this goes for education, health, a preserved environment, and the like. Frequently called indirect salary, these public universal and free access policies are essential, and more efficient when universal and free.
Investment in infrastructure is part of collective goods, improving both the quality of life of families (transportation infrastructure, energy alternatives, efficient digital access infrastructure, etc.) and the productivity of businesses. These investments create “external economies”, making the economy more efficient.
Public employment programs: With the impressive under utilization of the working force in Latin America, waiting for “the markets” to solve generate productive jobs, particularly with new technologies penetrating all sectors, is not realistic.
With so many things to be done, and such limited solutions in the strictly private sector, ensuring people can use their productive capacities, particularly at the local level (city maintenance, green agricultural belts around cities, etc.) will improve systemic productivity in the region, generate income, and balance local budgets.
These initiatives demand a reorganization of how money is used. The overall issue is not whether we have the money or not, or where it comes from, but to what uses it is applied. Overall, we must reduce inequality and environmental destruction. Three groups of initiatives are essential.
Tax reform: the Latin-American elites have been serving themselves well. In Brazil, for example, distributed profits and dividends are exempt. Proportionately, the poor pay more taxes than the rich. Tax evasion is huge, but not by the poor, with taxes on salaries and on consumption. It is a question of merit and justice on the one hand. But on the other hand, taxing idle financial capital should stimulate the fortunate to do something useful with their money. Taxing idle land, for example, would stimulate real estate speculators either to produce or to sell to producers.
Credit regulation: banks presently drain our economies instead of stimulating them. China has an efficient system of regulation through the CBIRC (China Banking and Insurance Regulatory Commission), Germany has very efficient proximity-finance with the Sparkassen and Landesbanken, Poland with the traditional financial cooperatives, France with the Placements Ethiques systems and the like. Banks should make money productive, not use it as financial extraction of rent for shareholders.
Decentralized management of public money: Latin America is presently in great part urbanized, and the different municipalities with their diversified needs can respond to the challenges of efficient money management much better than at the central level, where corporate and political pressures – both national and international – tend to predominate.
This overview of challenges and possible solutions should help us in identifying the diverse initiatives in different countries and regions. We need to ensure that our societies are economically viable, but also socially just and environmentally sustainable.
This in turn demands a new deal, a new balance between the public and private sectors, as well as with the civil society organizations. For it is for a society that this has to work, not for shareholders alone. And the pandemic has shown how deep our deformations go.
You are a strong critic of the financialization of an economy. Please comment on its role in the current crisis.
Financialization has also contributed to the change in the economic environment. While small businesses are facing difficulties both because of weak demand and expensive credit, big money has shifted from productive investment to financial speculation, which, as Thomas Piketty has shown on the global scale, pays much more with lower risk. Studies on financial flows, and particularly of fortunes in tax havens, show the divorce between big money and production. I have presented this transformation in detail in The Age of Unproductive Capital.
The only sector that is thriving is the commodity export business. The United States, China, and Europe are less interested in productive investment in Latin America, needing iron ore, copper, soybeans, meat, precious timber from the Amazon region, and the like.
This has led to what has been called the “reprimarization” of our economies, a technologically advanced reproduction of the old colonial dependency. It generates very few jobs, pays almost no taxes, and has a dramatic environmental impact. The financial and commodity drain on our countries does not promote development.
A closer look at the structure of the work force of Brazil, the dominant economy of the region, gives an idea of the structural flaws. The country has 212 million inhabitants, of which 148 million, the official work force, is 105 million, of which only 33 million have formal jobs in the private sector. If we add the 11 million in the public sector, we have 44 million formally employed. The underutilization of our working force is dramatic.
The informal sector, in which the income is half that of formally employed workers, is estimated at 38 million by the official IBGE statistical offices. Add 15 million unemployed and 7 million who just stopped trying, and we have 60 million persons underutilized in the work force.
This situation can be different in Uruguay or Costa Rica, but overall in Latin America, we have been waiting for foreign investment to find us attractive, for the so-called national bourgeoisie to invest, and in general waiting for “the markets” to promote development.
The reverse is happening, with industry leaving the region, productive activities migrating to financial speculation, and natural resources being drained with greater intensity. The pandemic is not only Covid-19, it is also another virus Jessé Souza has called Elite do Atraso, the backwardness of the elites.
Orinoco Tribune special by Edu Montesanti