Gates on Solving Persistent Poverty
|December 31, 2003||Posted by Staff under The Progress Report|
User Fees Can Humanize the Economy
Abject Persistent Poverty is Now A ‘Design Option’
The wealthy are not simply smarter, or harder working, or luckier, or more corrupt, compared to the poor. One of the factors that separates the world into haves and have-nots is how much value the haves receive from humanity’s common resources (such as land, water, and airwaves). In this important article, Jeff Gates looks at another common resource — the structure of financial markets — and proposes a “user fee” for those who enjoy its benefits. Try to see his entire line of reasoning. This article appeared in the Houston Catholic Worker.
by Jeff Gates
With the global spread of capital markets comes a fast-widening economic divide, both here and abroad. In the four years to 1999, the 200 most well-to-do people worldwide saw their wealth double to a combined $1 trillion. By 2000, the assets of the richest 400 Americans totaled $1.54 trillion. From 1998-2000, their wealth grew an average $1.9 million per day or $240,000 per hour, 46,602 times the minimum wage.
Worldwide, the richest 20 percent of the human family now accounts for 86 percent of global consumption while the poorest 20 percent scrapes by on 1.4 percent. With 4.5 percent of the world’s population, the US generates 25 percent of the emissions that account for global warming. Meanwhile the share of national income received by the top-earning one percent of US households nearly doubled from 1979-1997. By 1998, their income equaled the combined income of the 100 million poorest Americans.
The top fifth now claim half of nationwide income while the bottom fifth get by on a record-low 3.5 percent, down from 4 percent in 1985. Between 1979 and 1997, the average income of the richest fifth rose from nine times the income of the poorest fifth, to 15 times.
With bipartisan support for the spread of neo-conservative “Chicago” economics, both domestically and abroad, these divides continue to widen at a ever-accelerating pace as the “emerging markets” development model replicates US wealth and income patterns worldwide. For instance, the World Bank found that 61.7 percent of Indonesia’s stock market value is held by its 15 richest families. The comparable figure for the Philippines is 55.1 percent and 53.3 percent for Thailand. All three nations are routinely touted as venues where the neoconservative model has proven successful. In other words, the Chicago model is enroute to a build-out where a handful of already-affluent families will claim more than half the world’s financial wealth.
Meanwhile, since 1985, economic decline or stagnation has affected 100 countries, reducing the incomes of 1.6 billion people. For 70 of those countries, average incomes are less in the mid-1990s than in 1980, and in 43, less than in 1970. In 1960, the income gap between the fifth of the world’s people living in the richest countries and the fifth in the poorest countries was 30 to 1. By 1998, that gap had widened to 74 to 1.
Happily, the global spread of capital markets also presents a financial opportunity to eradicate persistent abject poverty. That’s because a nominal 3.5 percent levy on the average $5 billion of financial wealth held by the world’s 200 richest people would generate the $35 billion per year that the UN says is required to provide the minimal conditions required for the flowering of human potential: safe drinking water, sanitation, adequate nutrition, primary education and such. Three-quarters of those 200 people live in the world’s 30 richest countries; sixty reside in the US.
That $35 billion is roughly what the US spent in 1999 to maintain the military readiness of its nuclear arsenal a decade after the fall of the Berlin Wall. Or 17.5 percent of the $200 billion that the Bush Administration estimates as the fiscal cost of a war in Iraq. For the developed world to bear that $35 billion cost would require foreign aid totaling 0.7 percent of their combined GDP as compared, to an average of 0.22 percent presently contributed by donor countries (a mere 0.13 percent for the notoriously stingy US).
Let the User Pay
Development economists forget that capital markets operate as a global commons, akin to a shared pasture in which everyone grazes their livestock. No one owns the pasture, yet every user benefits from its use. Financial securities can only rightly be called “securities” because international law enforces property rights in those securities — from which a remarkably small number of people pocket the bulk of the benefits.
In addition to providing a risk-reducing opportunity to diversify, capital markets can be used to convert financial securities to cash. That potential liquidity boosts the value of a traded security by 35 percent when measured against untraded security in a couparable firm.
That’s why a “liquidity services fee” should be seen not a tax but as a capital commons user fee. At 3.5 percent, less than a typical value-added tax, that fee could recoup for the commons just 10 percent of the value that’s due solely to a feature the commons now provides free. By contrast, the well-known “Tobin tax” on currency traders, proposed more than three decades ago, is aimed at transactions in financial markets when, in truth, it’s the opportunity for a transaction that’s the real source of value. The difference is akin to the difference between kinetic and potential energy. A tradable security has more value than one not tradable, regardless whether it’s actually traded, as proven by the fact that its potential liquidity enhances its value as collateral.
In March 2002, a “Finance for Development” summit was convened in Monterrey, Mexico on the assumption that the needed funds could come only from the fiscal resources of the developed world. Yet to require that taxpayers anywhere pay for development, in effect, taxes them twice — once for the expense of creating and maintaining the capital commons, and then again to address the Chicago model’s chronic shortcomings while allowing a favored few to monopolize the bulk of its financial benefits. Happily, the requisite funds are imbedded in the very financial “properties” (its financial features, such as liquidity) that accompany the global build-out of the emerging-markets model.
What’s suggested here is a two-part user-fee designed to recoup for the commons a portion of the financial value that’s added by the commons. It’s long been clear whose cattle are fattened up in the capital commons. What development requires is a financial strategy that addresses the model’s most obvious failures — persistent abject poverty and environmental degradation — while also underwriting the political stability required to maintain financial value in a world where injustice, indignity and a fast-deepening desperation are otherwise destined to evoke continued resentment and instability.
Prosperity Bond Financing
What’s recommended here is a “prosperity bond” financed from the proceeds of two user-fees: a Capital Commons User Fee combined with a Freeloader Fee on tax-haven accounts. Both fees presume international cooperation to generate global financial transparency. That transparency can be catalyzed through the actions of nongovernmental organizations offering a combination of whistleblower rewards and negotiated political asylum for those in tax-haven jurisdidctions (bookeepers, secretaries, accountants, etc.) who divulge the data needed to identify tax haven account-holders.
The global reach of the emerging markets development model makes this development finance strategy potentially self-financing provided prosperity bonds are made a mandatory investment for tax-favored plans of deferred compensation in developed companies. In the US for instance, the budgetary expense of tax subsidies provided for retirement security — $553 billion over the next five years — is second only to national security in its fiscal impact. Pension plan fiduciaries, whose financial obligations are perpetually 20-30 years in the future, have a risk-management obligation to invest in long-term systemic stability, a goal shared by development strategists. Globally coordinated rulemaking in the 30 richest countries could require that pension plans invest in such bonds as a condition of their continued tax preferences.
With multilateral user-fee enforcement, the revenues required to pay interest on these bonds is more than ample. The IMF found a half dozen years ago that at least $4.7 trillion is hidden in tax-haven countries. More recent estimates put the figure closer to $14 trillion.
Assuming the total amount is in the mid-range of $9 trillion, a successful 3.5 percent Freeloader Fee would yield $315 billion per year, raising the $300 billion that environmental researchers at Cambridge and Sheffield Universities estimate is required to “save the planet.”
Justice Delayed is Justice Denied
The “Monterrey Consensus” provides a stark reminder that the, current development-finance mdel is certain to remain inadequate when compared to urgent human and environmental needs. At present rates of investment, the UN estimates that even universal access to safe drinking water cannot reasonably be expected before 2025 in Asia, 2040 in Latin America and 2050 in Africa.
The United Nations Development Program estimates that 1.1 billion people lack safe water. Adequate sanitation is lacking for 2.3 billion. An estimated 36,400 people die each day from conditions related to malnutrition, most of them children under five. One in seven children of primary school age is out of school. Primary health care remains but a dream even in the allegedly prosperous US. Yet development experts propose that we wait another helf-century to address basic human needs that we’ve known about for a half-century. Nothing could be more certain to breed the instability that is itself a key barrier to development.
Monterrey’s palpable lack of urgency, chillingly repeated in Johannesburg at the August 2002 summit on sustainable development, offers keen motivation to design a financing source for development and environmental restoration that is free of fiscal impact. A user-fee strategy meets that measure, assuming the requisite financial transparency can be generated and multilateral enforcement follows.
For more information on similar ideas, visit the Common Assets Headquarters
If everyone paid the full fair value for the resources — whether natural or other — that they use, it seems the world’s people would have a large fund with which it could eradicate human poverty. What is your opinion? Tell The Progress Report!