Protecting and developing local economies

Chapter 10 PROTECTING AND DEVELOPING LOCAL ECONOMIES 162 PROTECTING AND DEVELOPING LOCAL ECONOMIES Richard Douthwaite Richard Douthwaite is an economist, author and key thinker in the field of sustainable development. He has been a contributor to national and international conferences in these areas. He has taught extensively on the MA (Sustainable Community Development) for the Department of Adult and Community Education at NUI Maynooth. Why should anyone want to swim against what appears to be the tide of history by attempting to rebuild local economic systems which, over the past century, have been almost entirely swept away? Don’t small countries and the regions within larger ones really have no option but to participate in the global economy in a whole-hearted way? This chapter will explore the answers to these questions. Certainly, rebuilding a local economy is not an easy option, but I hope to show that it is one that is definitely worth making the effort to achieve. Few of us would worry about the regions in which we live being entirely absorbed into the global economy if that system was equitable, sustainable, and worked reliably and well. But it is none of these, which is why we need both to develop local alternatives to it and also to attempt its reform. Let’s look at each of these three areas in turn to see the extent to which the global economy fails. First, is it equitable? 1. Equity A few years ago, Westport, the town where I live, decided that it would attempt to lengthen its tourist season by advertising golfing-holiday packages in Sweden in the spring and autumn. Why Sweden? Well, the Swedes were regarded as rich and therefore a potentially lucrative market. For a few years, the plan worked and more visitors came. Quite soon, however, as one golfing holiday is much like another, Westport found itself competing for business with Scottish and Portuguese golf resorts. Everyone’s prices came down in the ensuing promotional battle, lowering the return to the holiday providers and effectively raising the incomes of the Swedes as they could now buy the same vacations for less money. In other words, the rich got richer and the (relatively) poor, poorer. 163 That is the way the global system almost always works. Indeed, selling anything outside your area in competition with other communities is likely to increase the relative wealth of your target customers. Your goods and services don’t have to cross international borders to have this effect. For example, I once stayed for several days in a very poor village in Tamil Nadu in India and I inevitably began to think about what the villagers could do to ease their poverty. The only assets they seemed to have were their labour and their land – could they grow extra vegetables and set up a co-op to sell them in Bangalore, the nearest big city? Well, they obviously could, but if other villages did the same thing too, the extra supply of tomatoes, okra and eggplant would bring the prices down, making the Bangalore people slightly better off while giving the farmers quite a lot less for their labour. The most obvious strategy for the village might not therefore be the best in the longer term. Rich countries and rich people always call for freer trade and better transport links because this heightens competition, brings down prices and thus makes them better off. As India’s roads improve, more and more villages will find it possible to send perishable produce to distant cities. This will destroy the partially-protected niches within which existing producers have been making modest incomes. The natural reaction of the producers to this will be to attempt to maintain their own families’ livelihoods by reducing their costs. They will cut their wages bills (thus eliminating other families’ incomes) by buying more industrial inputs such as pesticide sprays and machinery. This will reduce the proportion of the money from the sale of the goods sold to the outside world that is available to the village as a whole to live on. In other words, unless the total income from selling the vegetables increases by more than the cost of the inputs, freer trade and the extra competition it brings will make the village worse off. This process has been one of the factors widening the gap between the rich and the poor, both within countries and between them. A United Nations Conference on Trade and Development (UNCTAD) Report (1997) shows that in nine out of a sample of ten Latin American countries, the differential between the earnings of more highly skilled workers and their less skilled colleagues increased markedly between 1984 and 1995 as a result of freer trade. Indeed, in most cases, the real purchasing power of the least skilled workers actually declined, in several cases by over 20%. Similarly, an International Labour Office (ILO) study of 30 countries in Africa, Asia and Latin America found that in two thirds of the countries, the real wages of all workers fell between the late 1970s and the late 1980s, with the least skilled falling by the greatest percentage (ILO, 1996: Table 5.9). A recent World Bank paper (Lundberg and Squire, 1999) reported that data from a sample of 38 countries between 1965 and 1992 had shown that greater openness to trade had reduced 164 the incomes of the poorest 40 percent of the population, but strongly increased those of the remaining groups. “The costs of adjusting to greater openness are borne exclusively by the poor” the Bank said in a commentary. The italics are in the original. (Selected Reading: Article on Globalization and Inequality - http://www.worldbank.org/poverty/inequal/abstracts/milanov.htm) This widening of the gap between the least well paid and all other income earners in their societies is, in fact, exactly what standard economic theory predicts. In the 1930s Eli Heckscher and Bertil Ohlin developed the theorum which is now named after them and which states that each country tends to export goods that use the highest proportion of its most abundant, and hence relatively cheapest resource. For most ‘developing’ countries this resource is its unskilled labour and, as competition in international markets between such countries will tend to force the prices of their exports down, the earnings of the unskilled will be reduced by more than those of more highly skilled workers less exposed to foreign competition. All workers in sectors exposed to international competition may therefore see their wages fall as markets open up, but those most exposed will fare the worst. According to the United Nations Development Programme (UNDP) the difference in per capita income between the wealthiest 20% and the poorest 20% of the world’s population was 30 to 1 in 1960; jumped to 78 to 1 in 1994, and decreased a bit to 74 to 1 in 1999. The poorest 20 per cent saw their share of global consumption decline from 2.3 per cent to 1.4 per cent in the same period. In 1996 James Speth, then the administrator of the UNDP, said “We live in a world that has become more polarised economically, both between countries and within them. If current trends are not quickly corrected, economic disparities will move from inequitable to inhuman. In more than a hundred countries per capita income is lower than it was fifteen years ago, and, as a result, more than a quarter of humanity – 1.6 billion people – are worse off” (Speth, 1996). Nothing has improved significantly since then. Indeed, Professor Robert Hunter Wade (2001) of the London School of Economics thinks the inequality has become worse. Besides freer trade, another reason for the growing gulf between rich countries and poorer ones is that the rich countries issue the reserve currencies – the dollar, the euro, the pound, the Swiss franc and the yen – which the rest of the world uses to trade and to save. When gold was the world currency, wealth was created wherever the gold was found. Today, wealth is created in the reserve currency countries – the US, Britain, the Eurozone, Switzerland and Japan – when their banks approve loans. The total gain from having a 165 reserve currency (the technical term is seignorage) is the cumulative balance of payments deficit on the import-export account that the issuing country is able to run up. At present most of these gains are going to the US, which except for 1991 has imported more than it has exported every year in the past twenty. In those two decades it has amassed a costfree debt to the rest of the world of $2,500bn. This amounts to half the other countries’ total savings and, as I write, because it is importing half as much again as it exports, US indebtedness is increasing at $1.5bn a day. Britain’s gains from having a reserve currency are tiny in comparison and none of the other issuers is currently exploiting its ability to borrow cost-free at all. The US is able to finance its trade deficit cost-free mainly by selling government bonds and shares in US companies. Interest and dividends are paid on these securities of course, so it is not correct to say that the borrowing is interest-free. However it is cost free because the payments are made in dollars that are merely added to the total amount the US owes. The payments will only cost America anything if the dollars are ever used by the foreigners to whom they belong to purchase goods and services from the United States. Having the world’s main reserve currency has brought quite remarkable benefits to the US because the more dollars that the US creates and spends in the rest of the world, the more dollars the rest of the world will wish to invest in the US. These extra dollars push up the price of shares on Wall Street giving the foreigners who have already invested there an attractive capital gain – on paper. These gains encourage the investment of even more foreign-owned dollars, allowing the US to increase its current account deficit even more. We can get a good idea of how big a benefit this $2,500bn has been by recalling that in 1998, the United Nations Development Programme estimated that the expenditure of a sixth of that sum – $40bn a year for ten years – would enable everyone in the world to be given access to an adequate diet, safe water, basic education and health care, adequate sanitation and preand postnatal attention. The world-wide acceptability of the dollar is, in fact, the reason why the US, with a population of 281 million, is the world’s sole superpower, able to spend as much on armaments as the next twenty biggest arms-buying nations put together, countries with a total population of 3.5 billion. Even if the US were not misusing its position as the main provider of the world’s money, the reserve currency system would be undesirable. What it means is that if one poor country wants to buy from another, it has either to sell something to a reserve currency country or borrow the funds from one in order to get the money to do so. The situation is exactly the same in the Indian village – if two neighbours wish to trade, one of them has 166 to get the money first, directly or indirectly, from an urban centre to which somebody in the rural area once supplied something or went into debt. In both cases there is another powerful positive feedback mechanism. The poorer area sells to the richer one because that’s where the money is. Then, as we saw, competition builds up between the producers of the relatively standardised goods – minerals, foodstuffs, clothing and footwear – made in poorer areas, reducing the price each receives and thus widening the gap between them and their customers. Despite this, however, the poor have no option but to continue to sell to the rich because while other poor people might desperately want the things they are making, they don’t have the money to buy. In both the international and the internal case there is an inherently unequal relationship in which the richer party always wins. The system is fundamentally unfair. Only the establishment of a producers’ organisation like the Organization of the Petroleum Exporting Countries (OPEC) can provide a solution to the immiseration brought about by breaking down trade barriers and improving transportation to increase competition. 2. Sustainability As a result of globalisation, a high proportion of the world’s population now eats the same foods, is housed in buildings constructed of the same materials, drives the same cars and lives and works in much the same way. This uniformity means that much of humankind competes on world markets for the same raw materials – cotton, steel, cement, oil – and thus puts their sources under a high – and in many cases unsustainable – degree of pressure. Worse still, globalisation creates a positive feedback that rewards those countries and companies that consume the Earth’s resources most rapidly with incomes that enable them to purchase and destroy even more. It also destroys the negative feedback mechanisms that once warned communities to mend their ways when they started behaving unsustainably. Now that goods can be transported from anywhere for those with the money to pay, the better-off know that once the fertility of a district’s soil declines, its forests are felled, its mines exhausted, its seas fished out, they can always import their requirements or, if necessary, move somewhere else. There is therefore a close link between restoring local economic self-reliance and achieving sustainability. Theoretically it might be possible to develop a world-wide industrial culture that enabled all humanity to live sustainably within the limits of the world, but the scale and the complexity of the task are immense. An easier, more feasible alternative is to create a system that would encourage a greater diversity of diet, clothing, building materials and lifestyles. This would take the pressure off over-used resources just as it does in the natural world where each species has its own ecological niche and avoids competing directly with the others. 167 Diversity is desirable for other reasons too. For everyone who grows up in an area to find an occupation there in which they can feel fulfilled, a wide variety of jobs and other activities is necessary because people differ widely in their interests and aptitudes. A wide range of jobs creates a richness of life. It is important economically too because if a community or a country imports a lot of its requirements and relies on exporting a limited range of goods and services to pay for them, it risks getting caught out if something goes wrong or the market changes. For example, Ireland is the world’s second-largest producer of computer software. It also earns a lot from exporting milk products and beef and from selling itself as a tourist destination. Suppose that there is an airline strike, so the tourists can’t come. Or that the software companies find they can get equally good programmes written much more cheaply in Bangalore. Or that an outbreak of foot and mouth disease spreads to hundreds of farms and makes Irish beef, cheese and butter unexportable. The economic and social costs of any of these would be immense. Diversity is therefore essential to achieving sustainability. Unfortunately, though, a highly competitive world trading system which deliberately sets out to remove every possible barrier – including those of distance and, as with genetically-modified foods, consumer preference – to the free movement of goods and services leaves very few niches in which diversity can hide. Part of the problem is that a diverse economy almost inevitably produces at higher cost than one which specialises in a very few products. This is because many products exhibit what economists call ‘increasing returns to scale’. In other words, the more of them you produce, the cheaper they become. The first model of a new car to come off the production line will have cost many millions to create. In comparison, the one immediately behind it will be very cheap and the ones that follow that will become cheaper still as the company, its suppliers and its workers move along learning curves. Consequently, anyone producing relatively small numbers of cars will be at a price disadvantage because they will have to spread the development costs of their first car over a more limited production run and be unable to move as far as their bigger rivals along the learning curve. Exactly the same can be said of almost every product. Take something basic like, say, shoes. To produce them using modern methods needs an extensive infrastructure including specialist suppliers (or, better still, producers) of leather, soling materials, adhesives, clicking presses, press knives, sewing machines, thread and much more. It also needs people who know how to design shoes, others who can use the specialist equipment required to make them, and still others with the skills to keep delicate machines in working order. It therefore takes a considerable investment in people, equipment and facilities to produce the first shoe. This is the reason why every industrial economy in the world developed behind tariff barriers. 168 The German government knows this well. The main aim of its programme to get photovoltaic (PV) panels fitted on 100,000 roofs between 1999 and 2004 is not primarily to generate electricity. It is to give German PV manufacturers a chance to build up production volumes and get their prices down sufficiently to undercut all other producers in the world. The problem with increasing returns to scale is that, other things being equal, the biggest producers (like Microsoft, for example) will be the cheapest and most profitable and will drive almost all their rivals out of business. This leads to activities that could in theory be carried out equally well in many places in the world being concentrated in very few: Tariff barriers or some other sort of protection are therefore necessary if a region or a country is to develop or maintain a diverse, and thus more sustainable economy. The globalised economy is becoming increasingly unsustainable for another reason too. As we’ve seen, cheap transport is one of the pillars on which it stands – take that away and a re-localisation would automatically come about. And, in turn, cheap transportation depends on having cheap oil to fuel ships, planes and road vehicles. So how long will cheap oil last? The answer is that while oil itself will never run out, cheap oil will because many countries’ fields are becoming depleted. As a result, world’s production will peak within the next five or six years and then begin a steady decline so that by 2050, output will be no more than half the current level. Natural gas, which some vehicles burn, will also be becoming scarce by then. Its output is expected to peak in 2040 and then decline rapidly. Although alternatives to both fuels could be found – hydrogen from wind-generated electricity, perhaps, or oil substitutes produced from coal – a massive amount of capital and resources would be required to build the new systems required to take their place. In other words, the substitutes cannot be cheap, which in turn means that the movement of low-value commodities and any time-sensitive goods that have to be flown will decline. This will open new opportunities to local producers. In conclusion, then, while the global economy will always exist, it is not sustainable at its present size because it is destroying both the diversity required for its stability and the energy resources on which it relies. Local production for local use will therefore become very much more important. 3. Reliability Is it safe to rely on the world economy to deliver the essentials of life year after year? And can it provide us with a reliable income with which to buy those essentials? As I write, increasing numbers of people are finding that it’s failing them on the latter count. 169 Redundancies and business closures are becoming increasingly common in Europe and North America and a depression that has the potential to become as deep and long-lasting as that in the 1930s seems to be developing. In many countries, of course, the world system failed to deliver some time ago. All of subSaharan Africa is depressed and yet, despite commodity prices that, in real terms, are often below those in the 1930s, the people see no alternative but to try to export even more. Lesotho, apparently, has the highest rate of unemployment in the world at 39.3%, South Africa (23.3%) comes fourth and Botswana (21.5%) sixth but there may be worse places where government has broken down and doesn’t keep statistics. (The Economist, 2003). In Asia, employment levels have not recovered since the tiger economies crashed in 1997 and the fierceness of the competition between them means that deflation has set in. Japanese prices, for example, fell by an average of 2% in 2002. In Latin America, the currency crisis in Argentina has doubled joblessness in the past two years. It is now around 24%. Even oil-rich Venezuela has the 17th highest rate of unemployment in the world. Is there anywhere, indeed, where the world system can be said to be working really well? A depression is looming ahead because all the money we use apart from notes and coins is created on the basis of debt. Money typically begins its life when someone writes a cheque on a loan facility they have been granted by their bank or runs up a debt on their credit card. It disappears when that debt is repaid. Consequently, if you have no mortgage or debts of any sort and a positive balance in the bank, you only have that money because someone, somewhere, has borrowed it and is paying interest on it. The snag with creating money this way is that it depends on confidence and if optimism about the future shrinks, so will the money supply and, as a result, the volume of trading it is possible to carry on. So if enough people say to themselves something like “Perhaps I’d better not take out that car loan just at the moment. My firm isn’t doing too well and there might be redundancies. I’ll wait to see how things work out”, their fears for the future might well be realised. With fewer people like themselves borrowing, less money will be spent, and this will mean less work for their employers. Their collective caution could put them out of work. On the other hand, when lots of people borrow, it creates plenty of work and encourages further borrowing. The extra borrowing is needed because higher property prices require people to take out bigger mortgages and firms find they need extra capacity to keep up with demand. A virtuous circle is created with each round of loans creating the necessity for another. A boom develops which will carry on until either an external event cools things 176 every effort is therefore made to minimise them. If someone invests in a project in their own community, however, there are many ways in which they can get a return on their money quite apart from the interest they receive. Indeed, these non-interest returns might be so important that those financing the project might be prepared to charge no interest at all and even contribute to an annual loss in order to be sure it goes ahead. This might be because the project will provide employment for themselves or their children. Or because it will increase incomes in the area and help their existing business do better. Or because it will cut unemployment, thus reducing family breakdown and crime. Community investment projects are therefore very different animals from those run for the benefit of outside investors. For one thing, they seek to maximise the total incomes the project generates in the community, not just the profit element. So, far from seeing the wage bill as a cost to be minimised, they regard it as one of the project’s major gains. Attitudes to work are different too. Whereas outside investors seek to de-skill work within the factory so that they can hire the cheapest possible labour, a community company, particularly a workers’ co-op, would want the work to be organised so that those doing it find it interesting and fulfilling. Outside investors also have very short time-horizons for their projects, wanting to earn their capital back in three or four years. After that, if necessary, they can close the plant and move on. Communities, on the other hand, need long-term incomes for long-term projects like raising children, and a community-owned factory would want to produce for a safe, stable markets, most probably in its own area, rather than the market with the highest immediate rate of return. Similarly, while outside investors merely ensure that a plant’s emission levels stay within the law because anything better would cost them money, a community company is likely to work to much higher standards to avoid fouling its own nest. A world economy that was sustainable would therefore be almost the exact opposite of the present unsustainable one. It would be localised rather than globalised. It would have no net capital flows. Its external trade would be confined to unimportant luxuries rather than essentials. Each self-reliant region would develop to a certain point and then stop, rather than growing continuously. Investment decisions would be made close to home. And assets would be owned by the people of the area in which they were located. There is no space here to discuss how such a sustainable, self-reliant regional economy might be initiated and built or how it would have to be organised so that one section of its population did not take advantage of another. I attempted this task in my 1996 book Short Circuit which is now available on the web at www.feasta.org. All I can do here is to summarise the essential features of a sustainable territory: 177 ■It has a stable population ■It provides the basic necessities of life for its population from renewable resources under its control and expects to be able to continue to do so without over-using or degrading those resources for at least the next thousand years. It is therefore able to trade with the outside world out of choice rather than necessity. This frees it from the need to do unpalatable or unsustainable things in order to compete with other regions such as adopting potentially dangerous technologies or curtailing social protection provisions. ■It is able to protect its renewable resources and its population both militarily and economically. Its collection of economic protection weapons includes an independent currency and banking system. It has no debts to lenders outside and there are no net flows of capital across its borders, thus allowing its interest rate to fall to close to zero as it moves towards maturity. ■It does not depend on continual economic growth to stave off collapse. Its economy grows very slowly if at all. Making one’s own region sustainable along these lines might seem to involve turning it into a grim, restrictive place but I think that’s wrong and that it will become a liberating and joyous one instead. Certainly, the only way for an area to escape from a system that continually impoverishes the periphery by taking resources to the centre, wherever that centre might be, is to build a protective niche within which its local economy can develop diversity and become more sustainable. At present, because all our ideas about what constitutes development boil down to finding ways in which some of the money circulating in the remaining islands of prosperity can be captured by communities outside, we are destroying diversity and helping centralisation along. The World Bank, ILO and UNCTAD studies we discussed demonstrated clearly that whenever a poorer country or region attempts to satisfy the needs of a wealthier one rather than attending to its own, its dependency and weakness are increased. If we recognise this, we will quickly begin to think about the nature of development and how to protect our communities in a radically different way. 178 References Bourne, G. 1969 Change in the Village, New York: Augustus M. Kelly Douthwaite, R. 1996 Short Circuit, Dublin: Lilliput Press The Economist, 2003 ‘Pocket World in Figures’, London. ILO, 1996 World Employment Report 1996/97, ILO: Geneva. Lundberg, M. and L. Squire, 1999 The simultaneous evolution of growth and inequality, World Bank, December 1999 http://www.worldbank.org/research/growth/pdfiles/squire.pdf Rose, W. 1942 Good Neighbours, Cambridge: Cambridge University Press Speth, J. 1996 Speech on the 1996 Human Development Report, National Press Club, Washington DC, 16 July 1996. ftp://lists.inet.co.th/pub/sea-aids/plun/plun37.txt UNCTAD, 1997 Trade and Development Report 1997, New York and Geneva: United Nations publication sales no. E.97.II.D.8 Wade, R.H. 2001 ‘The Rising Inequality of World Income Distribution’, Finance & Development, Washington: IMF, Vol. 38, No. 4 December