The World Economy – Strengthening Democracy through Credit and Ownership

Presented to the
Global Training Institute International Leadership Training Seminar
of the Americas Global Foundation
the Cannon House Office Building, Washington, DC, April 14, 2009

Dr. Antonio L. Betancourt L.
Secretary General, Summit Council for World Peace;
President, World Institute for Development and Peace

and

Dr. Mark P. Barry
Senior Fellow for Public Policy

1112 Sixteenth Street, N.W., Suite 540
Washington, DC 20036
Tel. 202-269-5337 • Fax: 208-975-6207
E-mail: worldpeace@summitcouncil.org • www.summitcouncil.org

IN 1992, upon the collapse of the Socialist and Communist experiment in the Soviet Union, after more than 70 years of a state command economy, there were great pronouncements that capitalism had triumphed over Communism and socialism . Today, 17 years later we see clearly that peace and justice have by no means prevailed in the post-Cold War world. War, poverty and many forms of social injustice remain deeply rooted throughout the globe. While the benefits of globalization are trumpeted by the most industrially advanced countries, a seemingly endless series of economic and financial crises have arisen in the past decade — starting with Mexico in 1994-95, moving on to East Asia in 1997, Russia in 1998, Brazil in 1999, Argentina in 2001 — and most recently the United States in September 2008, when, according to many experts, capitalism died along with the collapse of the financial system within the U.S., carrying with it the economies of all industrialized nations. With this chaos in the economic and financial system, with the present challenges to democratic capitalism, industrialized countries and developing countries, in particular, seek another Just Third Way path toward development and prosperity, fully realizing that neither the capitalist road nor the socialist path are viable or just.

In big and small economies, there exist huge disparities in the ownership of productive capital that inexorably lead to imbalances in the international system. The largest disparity is in ownership of what can be broadly defined as property, especially corporate equity which tends to be concentrated in the hands of a minority of owners, depriving the majority of non-owners of the ability to own property and corporate assets themselves and limiting their income opportunities to wages provided by owners. Despite the differences between (Wall Street-style) capitalism and socialism in the role of the state, both economic models are inherently oligopolistic or monopolistic in the ownership of the means of production, and lead, however unintentionally, to the concentration of capital and credit in the hands of a few. We can see that the collapse of the financial system in the US was the responsibility of a small group of powerful financial institutions who made the decisions that affected the 300 million population of America and of over six billion around the globe.

Throughout the world, the widening gap between rich and poor — even within the most industrialized economies — has become an ever more serious problem, and a potential source of regional and global conflict in the coming years of the 21st century. The modern capitalist alternative of income redistribution — a feature of the so-called welfare state — does not expand ownership, and thus cannot cure, only alleviate, poverty. In the more prosperous countries, income redistribution is supplemented by a vast expansion of credit for the purchase of perishable goods and housing. In fact, the collapse of the capitalist economy was due to an irresponsible expansion of consumer credit for housing in an economy that was totally unsustainable. This, of course, vastly increased consumer overindebtedness, but not ownership, thus creating a bigger gap between the rich and the poor.

In the international arena, financial crises — which are always accompanied by a collapse of commercial credit — have been traditionally treated through the extension of loans by governments and international financial institutions, especially the IMF, as the means for the affected country to immediately repay its lenders. The strict conditionality applied to loans to insolvent countries, if strictly adhered to, make the underlying conditions worse and economic recovery more difficult. In the end, it is the consumer, mostly the poor and middle class in the affected country who foots the bill for the IMF bailout, not the donor nations or agency. Such financial crises are a nightmare for affected countries to bear, for the prescribed solutions are oftentimes worse than the disease.

The Summit Council for World Peace and the World Institute for Development and Peace and those of us who are part of the coalition for the democratization for access to money and credit, such as CESJ.org and others, believe that it is possible to decentralize capital and credit from the traditional monopolistic formulas of socialism and capitalism, thereby bringing access to money and credit to common citizens, and thus, empowering the majority of poor and middle-class — 80-90% of the average country’s population — with the ability to become owners of property and productive capital. By broadening the base of ownership, national economies can reverse the unjust, undemocratic and dangerous tendency for ownership to concentrate in the hands of a few, and for countries to avoid the ever-downward spiral of insolvency often due to circumstances beyond their borders. The changes required in national legal and economic systems are comparatively minor to make it possible.

In all corporate finance, projects must be self-liquidating — new investments, whether improved land, new buildings or new tools, must pay for themselves. Generally, three to five years is the normal period given for payback. For example, despite the over $2 trillion of new productive assets added to the U.S. economy every year, and the several trillion dollars added with TARP, virtually none of this newly created capital is financed in ways that create new owners. Yet, as suggested since the 1950s by lawyer/economist Louis Kelso and others such as the Center for Economic and Social Justice (www.cesj.org), most of these assets could be financed in ways that they could be more broadly and privately owned.

For an individual who is not wealthy — who in particular has no collateral, such as property — obtaining a commercial loan may be close to impossible. The simple reason: banks are afraid the loan cannot be repaid, and the would-be loan recipient has no assets that could be presented to pay for a defaulted loan. The vicious cycle that ensues is that those who are already owners can get more loans because of their expanding property ownership, while those without collateral have enormous difficulty in obtaining credit from a bank and therefore participating in their national economies. This is the common pattern because of the concentration of wealth.

SCWP and WIDP maintain that self-liquidating capital credit can be made accessible to employees of businesses and other non-owners of productive capital, turning them into independent capital owners. On a national scale, democratization of access to credit and ownership need to be supported by a comprehensive expanded ownership strategy throughout a national economy.

We advocate the application of “pure credit,” both on the micro and macro levels, which is a means of easing disparities in wealth. In its simplest explanation, it is giving credit to individuals, startup businesses or corporations who do not have any or sufficient collateral but who can prove to commercial lenders that their project or venture can be self-liquidating. Rather than seek collateral from the would-be loan recipients, commercial lenders would have their loans backed by insurance and/or reinsurance, funds set up specifically to protect the lenders and spread out the risk. Meanwhile, loans to current non-owners would be repaid to the lending institutions through the future earnings of the loan recipient’s business project, as long as it was deemed to have a sound business plan. No prior savings or collateral would be required in this use of pure credit.

Such a credit could be micro for small enterprises as well as macro for large ones, for example, infrastructure, such as highways, tunnels, airports, harbors, power plants, utility companies, etc. Major infrastructure projects can be accomplished through this methodology. An airport, a power plant, a utility company, can be built through a combination of economic technologies, such as Employee Stock Ownership Plan (ESOPs), Community Investment Corporations (CICs), etc. (see below) – which, working in tandem, can accomplish the project.

From a macro perspective, a country’s central bank would print paper (currency), and then sell it to commercial banks at 1-1.5% interest (or even less) to recover the cost of printing. In turn, commercial banks, would lend at an interest rate of 3-5% to cover the costs of loan administration and insurance/reinsurance. These financial instruments are not geared as profit makers for the banks, but only as service paid with the purpose of expanding citizen’s ownership of the economy.

Central banks would prefer the extension of pure credit to current non-owners, allowing the existing pool of savings (or wealth) to be used for non-productive government and consumer borrowing. The application of pure credit would expand a nation’s money supply in a non-inflationary way, freeing the economy to grow to the full limits of its workforce, resources and technology. New capital creation would become a source of an expanded income for the poor and middle-class who do not have an adequate and secure income; they would produce and earn more as owners of “procreative” capital. This in turn will create more opportunities for profit making for the existing banking system.

There are a number of expanded capital ownership structures that can be effective tools to bring about the democratization of access to credit and ownership. These include the Employee Stock Ownership Plan (ESOP), which has a proven track record in the United States (1,500 U.S. corporations are 100% employee-owned), the Consumer Stock Ownership Plan (CSOP — e.g., stock ownership plans for utility users and regular customers of enterprises), and the Community Investment Corporation (CIC — e.g., residents share ownership of local land development corporations and community infrastructure). Such structures would need to be set in place as a pillar of economic policy, where political focus would shift to needed monetary, banking, insurance, tax, and other legal reforms necessary to create a system where capital ownership is accessible to every citizen (i.e., legal and institutional barriers to more equal ownership opportunities would need to progressively be dismantled). Ownership would be decentralized not by depriving existing owners of their wealth, but by increasing overall wealth and enabling non-owners to become new owners.

The implications of expanded ownership and credit are profound. For countries with a highly educated work force — such as India, China, South Korea, Brazil, Indonesia, Colombia, Mexico — many people lack legitimate means of engaging in full economic participation, especially in the ownership of income-producing capital. At best, in the case of Colombia and Mexico and in many other developing countries, much of the educated labor force is compelled to join a limited informal black market, and at worst, to join the criminal economy which in many countries is expanding at a faster pace than the formal economy. Those economies are not growing and expanding at the level to meet the supply of labor and technical forces available. Yet legitimate and attractive opportunities can be created through ownership-expanding methods. These state-of-the-art technologies can assist the creation of new companies and help existing firms who are currently state-owned but must become privatized and profitable.

While the investment communities in New York, London, and Tokyo, as well as international financial institutions like the World Bank, have available funds to finance significant private sector development, at best they can only create jobs. Many countries, however, are unable to absorb a major inflow of capital because their business environment is not conducive to secure a return on the investment; the private sector fears losing its collateral and thus cannot utilize these funds. This is the case in the U.S., with the enormous stimulus package given earlier this year to the big monetized few, which has not trickled down to the unmonetized majority. The same has happened in many other countries who have been recipients of hundreds of billions of dollars as part of their own stimulus package. In many instances, the private sector could only absorb limited amounts of these funds since they cannot guarantee an absolute return of the investment plus income and profits. However, through democratizing access to money and credit, this can be overcome because money will go strictly to lift common citizens and communities across the nation from the bottom up within a true market economy for the masses framework.

Moreover, rather than restructure an existing economy, it is possible to establish a parallel legal program to foster system-wide experimentation with ESOPs and CICs based on economic democratization. This would not disturb the existing economy in a country, or cause resistance from those who might perceive restructuring as meddling or interference.

SCWP and WIPD and other advocates for Capital Homesteading and Citizen Ownership envision a future where, facilitated by capital credit and loan default insurance, each citizen can begin to accumulate dividend-yielding shares in:

1. The company he or she works for through an ESOP;
2. The companies he or she regularly buys from through consumer stock ownership plans (CSOP); and,
3. A community investment corporation (CIC) to link citizens to the profits from local land planning and development including infrastructure improvements such as highways, railways, bridges, utility companies, harbors, tunnels, etc.

The World Bank, IMF and other international financial institutions find themselves in a major dilemma. They want to promote ownership expansion and private sector development, yet the international financial system, especially with regard to development assistance, is geared towards maintaining the status quo – channeling funds that tend to increase the concentration of ownership in every country.

Another example is what happened in Bolivia a few years ago: Bolivia had the opportunity to export natural gas to Mexico and the United States, yet the reaction of the Bolivian public was that only the elites in the country would benefit from this transaction, not the masses. As a result the Bolivian government nationalized the sources of energy in the country – gas and oil – creating a socialist-style monopoly of these assets, a concentrated economic power on the bureaucracy of the State. However, this could be corrected through the implementation of ESOPs and CICs – real mass economic empowerment for the common citizens of Bolivia owning the natural gas and oil enterprises and infrastructure as was done with the natural gas pipeline in Alaska which is today owned by the indigenous population of Alaska and other provinces in Canada.

The disenfranchised mass public tends to revile international financial institutions. These institutions are seen as benefiting the status quo, not the people in need, and protecting themselves and their counterparts in poor countries. Apathy and resentment towards the World Bank, IMF and other “IFI’s” has reached such a crescendo that they can no longer safely hold annual meetings in major capitals, but must try harder to gather in locales that protect them from the possibility of public violence. This reflects a negative perception and even hopelessness from the masses that there is little possibility of them having meaningful participation in shaping their future. The masses feel an enormous burden on their shoulders to be responsible for the financial moves of their governments which in the past only benefited a few and did not improve the conditions of the majority.

Given this reality, we believe these international financial institutions would be keenly interested in new structures to receive funding that would broaden mass ownership rather than further enrich oligopolies or kleptocracies. The world needs a plan that will create a market economy for the masses in the next 10-20 years.

The Summit Council for World Peace and the World Institute for Development and Peace are willing to collaborate with the civil society in interested nations in providing advice, facilitation, and to work together to address the problems of the lack of participation of the masses in wealth production and ownership. There are other institutions that we are sure are willing to help, such as Equitech International , the Center for Economic and Social Justice , and the Kelso Institute.

The benefits of expanded access to credit and ownership will have a profound and positive long-term impact upon the national and regional economy and of course on the world economy. It will create a true democratic democracy to parallel a political democracy. It will close a bitter chapter of the haves and have-nots by creating a nation of owners. We know of no better tool today with the potential to cure the pervasive problem of national and world poverty.

Recommended Reading

Bailey, Norman A., “Central Bank Funding of Economic Growth and Economic Justice through Expanded Capital Ownership,” Washington, DC: October 2002 [available at www.cesj.org]

Prepared by Dr. Antonio L. Betancourt L. and Dr. Mark P. Barry

Betancourt, Antonio, “For the Colombia of the 21st Century: A Proposal of Economic Justice to Make Each Individual an Owner,” Bogota, Colombia, March 2001 [available at www.widp.org ]

Kelso, Louis O., and Adler, Mortimer J., The Capitalist Manifesto, New York: Random House, 1958 [available at www.kelsointitute.org ]

Kurland, Norman G., “A New Look at Prices and Money: The Kelsonian Binary Model for Achieving Rapid Growth Without Inflation,” Journal of Socio-Economics, 2002 [available at www.cesj.org]

Kurland, Norman G., Brohawn, Dawn K., and Greaney, Michael D., Capital Homesteading for Every Citizen: A Just Free Market Solution for Saving Social Security, Washington, DC: Center for Economic and Social Justice, 2002 [available at www.cesj.org]

Dr. Antonio Betancourt L. Secretary General

Dr. Mark P. Barry Senior Fellow for Public Policy