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• • • The central idea These initiatives in favor of socially inclusive growth cannot achieve their potential, either for growth or for inclusion, unless they take place in a favorable macroeconomic climate. If the practical and psychological forces of production are bound, hand and foot, by contractionary monetary and fiscal policy, such initiatives will remain dwarfs. And nothing is more pathetic, Carlyle remarked, than a three-foot pyramid. Yet your government cannot now give a conventionally expansionary form to either monetary or fiscal policy. Monetary policy lies in the hands of a Central Bank that, under the guise of inflation targeting, has bowed down to the cult of financial confidence, and accepted the self-mutilation the rich countries recommend to the poor ones in the name of sound finance. Even if you were able to force the Central Bank to cast this false orthodoxy aside, the benefit would be limited by the reality of credit rationing, while the price -- in loss of financial confidence -- would continue to be paid. The use of expansionary fiscal policy is inhibited by the need to struggle against the cripplingly low tax take. It is limited as well by the pressure to placate the prejudices of the domestic and international financial markets, so long as you continue to need their money as well as by the wisdom of not provoking the Bank of Mexico into a yet more restrictive orientation. In this contrast -- between the need for an expansionary economic environment and the exclusion of the traditional monetary and fiscal means for achieving it -- lies the most formidable obstacle to a program of economic recovery in Mexico now. There is a way out. It need not affront either the rights of property or the true orthodoxy of the economics textbooks. It does not require head-on combat with the Central Bank. Nor does it imply any lessening of the effort to raise the tax yield. It requires a courageous and creative response to the circumstance of the place and the moment. Its prospects depend on its association in the popular mind with the effort to equip the unequipped, on the rapidity with which it can stoke the fires of production, and on the success of your government in developing new political and social bases for its execution. The unconventional use of fiscal policy I begin with the more familiar part of this set of proposals: the use of tax incentives and disincentives. After proposing a list of the most important contexts in which you should consider using differential fiscal policy as part of a program of economic reactivation, I address the major objection to such a practice: the idea that it represents a dangerous invitation to both dogmatism and clientelism -- picking winners and picking favorites, or picking losers and picking victims. Consider the following fields as leading candidates for fiscal incentives and disincentives. It should be the aim of this part of the program of economic reactivation to maintain and even heighten the overall tax yield. However, the emphasis should fall on lightening the tax burden, over an extended transitional period, for businesses that commit to the recovery program rather than on punishing, by higher tax rates, those that do not. Because these proposals are all designed to break through supply constraints, they should turn the government's tax sacrifice into a medium-term increase of the tax take. The goal of maintaining the tax revenues should be understood dynamically rather than statically: the focus is on the aggregate effect over a reasonably short time -- your own "sexenio" -- but over time nevertheless. For the general character of these proposals, as of every part of this program, is to combine the democratizing of the market with the mobilization of national resources, finding new engines of growth in the economic enfranchisement of the disenfranchised as well as in the restructuring and reorientation of established business. In this sense, my proposals for differential fiscal policy, like the entire program of which they form a part, represent less a revived Keynesianism than a progressive intervention on the supply side. Insofar as they address the expansion of demand, they do so only by simultaneously and actively seeking a breakthrough in supply constraints. Translated into the language of multiple equilibria, they seek to reach a high-level equilibrium -- more growth, productivity, and employment -- through a series of engineered and controlled disequilibria. 1. Employment and training of low-wage labor. Not only should all payroll taxes on labor be repealed, but ways should be explored to provide tax incentives for the employment and training of low-wage and unskilled or semi-skilled labor. The incentives might be provided, for example, by allowing for credits against other corporate taxes. Business that boost productivity, economizing on labor should not be punished. But capital-intensive firms that want to deal with the government or its banks, as suppliers or clients, should be required to demonstrate their commitment to training and employment programs for new workers and job seekers. In this way, the business interest in developing a pool of more qualified candidates can be made to serve the public interest in higher employment and stronger skills. 2. Higher value-added production for export. To the extent compatible with the Nafta and WTO agreements -- testing their limits, as you should -- reward businesses that add value in the process of manufacture and export with tax breaks, and punish those that do not with heavier tax burdens. The international restraints on such a policy are likely to become acute in the implications for domestic content. However, it is vital to establish the case for distinguishing the issue of domestic content from the issue of technological evolution, despite the causal connection between them. 3. Production of capital goods and inputs for the rearguard. A major aim of the differential use of tax policy should be deepen linkages between the vanguard and rearguard sectors of the economy. More capital-intensive and technology-rich industries should produce machines and materials useful to the more rudimentary industrial, commercial, and agricultural enterprises that remain oriented to the domestic market. An example is the simplified computer that has been developed in India, with a vast range of economic and educational uses. The government should establish. in partnership with domestic and foreign private enterprise, a joint public-private organization for the assessment, transfer, and production of suitable, cost-effective technologies. It should facilitate credit (on market rates) to enterprises that serve the production needs of firms of all scales that are oriented to the domestic as well as the foreign market. And it should give to enterprises that are willing to embark on the advanced production of simplified capital goods, inexpensive inputs, and innovative, simplified, and cost-effective technologies, a substantial grace period in the payment of the value-added tax, subject to performance-based review some time during that period. 4. The location of manufacturing facilities in the South, in the context of a concerted policy of regional development. The tool could, once again, be the award of an extended grace period in the value-added tax. Such a policy should not be formulated and imposed from the top. It should be negotiated, with broad-based participation by experts, local governments, social organizations from the region itself as well by businesses that are willing to consider participating. The key question in the use of tax incentives and disincentives in all these fields is not the aggregate effect on the tax take and the need to prevent serious tax loss. It is the ability to develop an deploy differential fiscal policy without sinking into political favoritism and economic dogmatism. Mexico cannot accept a choice between laissez-faire and favoritism, between a government that does nothing for production and a government that surrenders to lobbies. In seeking to escape this impoverishing choice, Mexico must develop a form of government-business relation that offers an alternative to both the American model of arms'-length regulation of business by government and the Northeast Asian model of centralized formulation of trade and industrial policy by a national bureaucracy. The alternative arrangements and practices the country need should be rule-based and performance-oriented, keeping administrative discretion to a minimum. They should be decentralized and participatory, providing for the engagement of interested firms and groups in a range of different venues. They should condition every measure of fiscal favor on its utility to the entrance of new firms and groups into the national and international market. And they should be pluralistic, having as their goal the development of multiple programs of strategic coordination that would coexist experimentally with one another, rather than the imposition of a single master plan. It is a prescription that applies to this entire program of growth and inclusion, as well as to the special problems of differential tax treatment. Compensating for the lack of expansionary monetary policy: liquidity without inflation The creation of a growth-friendly climate requires the unconventional use of monetary as well as of fiscal policy. The quasi-monetary part of my proposal is as unorthodox as the fiscal part is familiar. It nevertheless represents an indispensable part of this program. Although it is unconventional, it violates no rule of the true core of sound public finance. It merely loosens the grip of a contractionary policy, imposed in the name of financial confidence, in the midst of deep recession -- a practice, I insist, that although now commonly accepted by third-world governments, cowed by high finance and central bankers, is foreign to any generally recognized orthodoxy in contemporary economics. By loosening the grip of that recession-aggravating policy, this part of the reactivation program gives to the needs of the real economy the priority they deserve. My proposal here serves three objectives. The first goal is to create an instrument for countercyclical management of the economy when the traditional fiscal and monetary devices of such management are unavailable. The second aim is to inject liquidity into the Mexican economy without provoking inflation through a consumption boom and a wage-price spiral: every part of the boost to liquidity remains tightly linked to the expansion of production. In the vocabulary of multiple equilibria, the point is to force movement from a lower-level equilibrium to a higher-level one. The third purpose is to link more tightly the mobilization of national resources and the democratization of economic opportunities. The additional liquidity is for the sake of broader opportunity as well as more activity. In light of these considerations, I propose a system of National Development Vouchers. (I use the term "voucher" rather than "bond" to avoid some of the financial connotations and legal implications of the latter.) The government would issue National Development Vouchers in partial payment for development-oriented public works, at many different scales, all the way from the small to the massive. The public works program would include highways, dams, irrigation systems, public housing projects, school buildings, and community or medical centers. The vouchers would be collateralized on the basis of future tax receipts. They would have a fluctuating value, indexed to an index that would be composed of two elements: the growth rate of the national economy and the level of tax receipts of the federal government. They would be payable directly by the government on a relatively short schedule, with the preponderance of the obligation to be met during your "sexenio." They would trade in a secondary market, which the government, together with domestic and foreign financial institutions, would help organize, so that those who accepted this paper in payment of governmental obligations could cash it in, at a significant discount, in this secondary market. The government would ensure the firms it paid with this paper of a floor to the discount in the secondary market, holding them secure against catastrophic loss and breathing confidence into the secondary market. The use of the vouchers would be restricted to a list of areas of investment connecting economic growth with social inclusion. To ensure this connection, as well as to develop the institutional machinery of economic democracy, the range of permitted use would be the subject of an organized and ongoing discussion with three sets of groups: (1) organizations representative of different sectors of civil society, (2) businesses, especially construction businesses, which would have to rank high among those who accepted National Development Vouchers in partial payment for their goods and services, and (3) financial organizations, especially the banks, primarily private-sector banks, that would help set up the secondary market in this security. I propose that there should be separate and simultaneous series of discussions between the government and each of these sets of groups as well as a general venue in which representatives of all would meet together. On the side of the government, the development ministries and agencies would have to work closely with the finance and tax authorities. The whole regime of negotiation would make a powerful contribution to a new form of "social partnership." These instruments for the ongoing renegotiation of what is a a social as much an economic contract would be born free from the grip of the decaying corporatist institutions of the PRI regime. The economic logic of this National Development Voucher system is straightforward although the device through which this logic operates may appear heretical. The central purpose is to create not a generic power to spend, which can be dissipated in consumption and inflation, but a focused power to invest in productive activities capable of addressing the needs of tens of millions of people, and of creating jobs and opportunities for them. The use of indexes keyed to economic growth and tax receipts has recently been a subject of sympathetic discussion in economics, and would win the support and even the enthusiasm of many progressive economists throughout the world. The greatest objection to this proposal will be its novelty. The second greatest objection is that it may be seen as a circumvention of the tight money policy of the Central Bank. Both these objections must be met head on. Mexico must do what every other successful country in modern history has done before it: open and invent its own way, picking and choosing from around the world, but forging the whole into a path of its own. As to the Central Bank's
preference for a restrictive monetary policy, pursued in the midst of a
deepening recession, with potentially calamitous social consequences, this
proposal allows you neither to attack it outright, nor to accept it with bowed
head. It is the duty of any Mexican government committed to economic growth and
social inclusion to find a way out, rather than to wait passively for the
Mexican economy to be taken down, and then up again, by the economy of the
United States. This proposal maintains the essentials of sound public finance
while combating the self-mutilation recommended by the pseudo-orthodoxy of
deliberate contraction in the midst of recession. It does not take the Wall
Street-IMF. line (for third-world countries) on a take-it-or-leave-it basis. It
splits that line into an element that can be accepted, and an element that
cannot. It avoids the scourges of economic populism and high inflation, but
gives commanding authority to the needs of the real economy.
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