Volume 44, Number 174, July-September 2013


EDITORIAL
AUSTERITY AND THE PUBLIC DEFICIT: THE MISSING DEVELOPMENT DEBATE

revista164The widespread problems resulting from the recent major crisis, as well as the series of erroneous governmental policies aimed at their resolution, have taken priority in economic debate throughout the world, ranging from development policy to the oft-repeated adjustment policies. Following the enormous global recession of 2009, governments implemented stop-go policies to temporarily alleviate credit restrictions (widespread contraction in the liquidity of global financial markets), and to avoid an overall decrease in financial returns. We are therefore facing a panorama of elevated profitability for financial markets, slow economic growth with recessions and employment stagnation.

How can we achieve greater austerity in public spending, especially in the social realm, without reducing investment, and without touching financial services spending? This has become the crucial point of debate in the area of public finance, rather than a discussion on how and where to spend public funds.

Reducing public deficits, balancing governmental finances and austerity have become the central points of debate on the global stage. Economic policy makers from all countries, international financial organizations and central banks have insisted on applying austerity policies to resolve the crisis. Implementing austerity measures to reduce the public deficit and therefore reduce public spending has become a daily event. Governments with surplus spending force the private sector to take on deficits, and this means that either families or businesses become significant and growing debtors. This cycle continues until one of the sectors is unable to withstand it, as occurred with the mortgage crisis (debt of families and firms), which took place in many countries starting in 2007.

Public policy makers are also concerned about the slow recuperation of economic growth, but the fact that the public sector implemented a financial rescue to address bank insolvency only increased debt and granted ample protection to institutional investors.

Austerity as a policy and dogma is reminiscent of the nineteenth century in Mexico, when the nation was trailed by its creditors in Spain, France and the United States. A more recent example would be the reformulation of public spending to pay off the external debt service in Latin America in the 1980s. Renegotiations and austerity plans characterized the so-called “lost decade,” together with the Washington Consensus reforms. Hegemonic thought was present in forming practically all of the public policies that have brought about structural changes to the import substitution model, created under the influence of Prebisch following the post-war era in our region.

Latin American governments have used the discourse and dogma of austerity in public spending to maintain and elevate payments of external debt, even modifying the prevailing populist and statist discourse up through the 1970s and 1980s. Latin American democracies of the 1990s were protected by hegemonic thought, with independent central banks and budgetary equilibrium, accompanied by the increase in international reserves for the stability of speculative flows of capital and labor market flexibility to maintain low salaries. The economic structure in this time period was immersed in a strong transformation of its productive chains, financial circuits and greater insertion of countries into the global market. This process has left behind enormous impacts on the social and productive structures. It should not be forgotten that although the last decade has seen economic growth, it has mainly been based on the exportation of natural resources, cheap labor and enormous environmental destruction.

Debate surrounding the development of the global economy over the past months has led to new alternatives to single ways of thinking, in the face of uncertainty about the direction of the crisis, the recession and high revenue in the stock markets. Beyond the crisis, the greatest concern is the expansion of the shadow financial system. Attempts to regulate this system have been blocked by an ideological wall that has proved difficult to transform. These attempts have also faced obstacles in reestablishing social policies and in the viability and sustainability of the primary export model. The development debate still faces big challenges ahead, especially in light of the dominance of hegemonic thought, which has persisted, even in economies that have dealt with the crisis using more flexible monetary policy. Capitalism is facing a structural crisis, in light of the incapacity to achieve full occupation and the deepening unequal distribution of wealth and income, as Keynes writes in the second part of chapter 24 of his book The General Theory of Occupation, Interest and Money .

The debate surrounding austerity policies and zero public deficit policies once again sheds light on growth and economic development in our region. Reducing public spending leads to low growth and economic development and impacts the economic policies of the public sector. As a result, a post-Keynesian solution to the public deficit problem would be to incorporate the role of a good deficit that grows with social development. This debate has been absent in recent years.

This issue of the Problemas del Desarrollo journal includes the following current articles.

First, “Setbacks and Challenges for Social Policy in Mexico,” by José Narro Robles, David Moctezuma Navarro and Diego de la Fuente Stevens, is a significant example of how austerity programs have canceled out social policy in Mexico. Despite serious efforts from the federal government to use these policies against poverty, the results have not been as expected. Social policies that have been unable to reduce inequality gaps and have seen the addition of 50 million people to the group of income poverty have done little else besides create too many programs with too few results. Mexico is a nation that has failed to improve the standards of living for its population, even 100 years following its social revolution. The authors inventory the programs implemented over the past decades and evaluate their performance. The data is telling, especially for indigenous populations living in rural communities. The authors demonstrate the lack of coordination among different ministries in light of the diversity of programs whose priorities are social development and overcoming poverty. The authors conclude that although macroeconomic equilibrium is important, achieving social policy accompanied by economic growth with social equality is even more so.

Secondly, we have “Schumpeter and the Post-Schumpeterians: Old and New Dimensions of Analysis,” by Gabriel Yoguel, Florencia Barletta and Mariano Pereira. This work analyzes how, starting with the crisis of the capitalist system, heterodox thought has responded to development and the economic cycle. For Schumpeter, the conditions of development, competition and the process of creative destruction are fundamental. The authors highlight the currency of his work in the modern evolutionary theory of innovation and technological change, with the understanding that Schumpeter’s works emphasize industrial mutation and revolutions from within the economic structure. Later, the authors describe the evolutionary and neo-Schumpeterian approaches that other authors have created using Schumpeter’s works as a starting point. This is a classical reading in the midst of the current crisis and evolutionary neo-Schumpeterian thought.

The third article is by Alejandro Dabat and Paulo Leal, entitled, “The Decline of the United States: Global Historical Context,” in which the authors go into depth regarding the capitalist crisis that originated and developed in the United States, and later spread to Europe. The decline of US hegemony, in comparison to China, and the breakdown of the neoliberal global world order are also addressed. The authors describe international trends in the Information Revolution and the new or shadow financial system. The authors emphasize the reduced national productivity per worker, which went from an annual average of 2.5% from 1990-2000 to 1.4% from 2000-2010. They also mention the nearly zero growth of national revenue per inhabitant, at 0.7%, which increased social inequality close to the critical level of 0.5%, usually only found in the most unequal nations in the world. In the words of the authors, this will undermine the long-term sociopolitical sustainability of the United States.

In the work, “Salary Gaps in Uruguay: Gender, Segregation and Unequal Labor Qualifications,” Alma Espino writes about mismatch in the skill sets of the Uruguayan labor force and its link to occupational segregation. Interpreting gender salary gaps in neoclassical economics usually is based on differences in productivity and discrimination factors. The latter element appears when the salary gap cannot be explained by economic features that affect labor productivity or by the features of a job. The author develops salary regressions that describe gender labor segregation. The work breaks down the results to explain what factors are behind the differences between men and women. Finally, the text calculates the magnitude of labor segregation and skill mismatch in salary gaps using an equation estimate that incorporates these explanatory variables. In Uruguay, occupational segregation is a persistent issue, which has been empirically identified as one of the major sources of salary differences between individuals of different genders.

In the article, “Central America: The Urgency of Coherent Commercial Diversification,” Juan Sebastián Castillo, Esther Aguilera and Carmen García Cortijo use various models to develop a scenario for the geographic diversification of commercial relations in this region as a function of the basket of products. High commercial concentration with the United States (32.05% of all exports) means that it will be necessary to expand commerce within the region (26.1%), a process for which governments and business leaders must innovate to identify areas of opportunity. It will be key to diversify earnings with China and Europe, a promise yet unfulfilled, as well as the rest of Latin America. Betting on a single commercial partner is not an option for a region that represents 2.1% of the Latin American territory with only 39 million inhabitants. Export growth in the time period 2005-2010 was at an annual average rate of 8%, while the rate for imports was 7.37%. Chinese penetration is also notable as a coherent commercial diversification strategy.

In the next article, “Colombia: Commercial Insertion and Trade Imbalances in the Pacific Basin,” Jaime Torres describes the commercial balances between Colombia and countries of the Pacific Basin. From 2008-2010, growth was surprising with respect to exports and imports. The former were highly concentrated in mineral derivatives with 63% at low added value. Industrial and agro-industrial exports grew at an annual average of 24%. However, imports from the Asian Pacific represented 80% and were made up of medium and high-level technology industrial goods from 2009-2011. Import dynamics are a more recent phenomenon and highlight the importance of close commercial relations with China, which displaced a traditional provider, Japan, in 2011. The article concludes that the current pattern of inter-industrial commerce is a repeat of relations maintained at the beginning of the previous century. Another major issue is the inflow of capital to the mining export sector, whose effects have been shown in the reevaluation of the currency, known as “Dutch” disease.

The article, “Manufacturing Entrepreneurship and Development in the Mexican States,” by Martín Ramírez Urquidy, Manuel Bernal and Roberto Fuentes, postulates a close relationship between entrepreneurial patterns and the economic development of a country. This principle is based on socioeconomic features, the institutional context and the stage of economic development. The authors demonstrate their hypothesis by describing how the various states create differing conditions for business structures and entrepreneurial capacities. Economic, social and institutional forces are among the most important factors, besides the competitiveness of business structures in the various states. All of this points to orienting local public policies towards businesses. This might include establishing technical assistance and business training programs that could improve entrepreneurial practices, even among less fortunate groups. It would also include links between higher education and the productive sectors. Coordinating educational, science and technology policy must be part of the plan to drive forward innovation, entrepreneurship and productive improvements.

The commentary section includes a work by Pablo Andrade, entitled, “Why is History Important? A Debate on Economic Development Policy.” This work states that history is one of the most important elements of development theory. It is therefore necessary to situate contemporary analysis of economic development in the historical study of institutions whose emergence and trajectories have defined development in many countries. The author highlights the need for economic policy dialog with economic historians, development economists and political scientists. Undoubtedly, philosophy and culture also have a place in the debate surrounding economic development.

The review section introduces five books: The Current Panorama of Latin American and Caribbean Integration, coordinated by Alfredo Guerra Borges and reviewed by Patricia Vázquez; Modes of Development, Territorial Organization and Constituent Changes in Ecuador, by Ana María Larrea Maldonado, reviewed by José Luis Maya; a mandatory reading, Return to Keynes: Fundamentals of the General Theory of Employment, Interest and Money, by Axel Kicillof, reviewed by Alejandro López; Foreign Direct Investment in Mexico: 1980-2011, by Samuel Lichtensztejn, reviewed by Josefina Morales; and, finally, Challenges to Exploring and Producing Crude Oil in the 2012-2018 Term, by Fabio Barbosa Cano, reviewed by Irma Delgado.

Alicia Girón
Journal Editor
unam, June 2013

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 192, January-March is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Feb 23th, 2018.
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