Post-Covid economy: ppportunities for an era of shared prosperity
In terms of technological revolutions, Dr. Carlota Pérez is one of the most innovative researchers worldwide, according to Manuel Castells. She has identified their historical patterns and analyzed their impact on the economy and society, adds W. Brian Arthur. The professor shares with us this time, a rigorous analysis of the global situation, of the economic and social consequences of the health emergency, and of the opportunity to channel the technological revolution underway towards a model of green, intelligent, global, and shared prosperity growth.
Por: César Guerrero Arellano and Miguel Ángel Ramírez

Do you think we can equate the current crisis to that of the 1929 Great Depression or the 2008 financial one?

It’s a complex comparison, but considering its probable depth, likening it to the 1929 crash and 1930 depression is valid. However, the answer to the post‑COVID crisis will have to be very different than that of the Nasdaq or 2007-2008 crashes, when large sums of money were printed in order to provide liquidity to banks without dealing with debtors, the real economy or society. The current collapse is multifaceted, with deep and widespread consequences. To overcome it, institutions must be reformed and their policies rethought, and we need to go beyond mere monetary or fiscal measures.

 

Luckily, we are in the middle of the current technological revolution: a key moment. “Creative destruction” has already taken place and there is a huge transformative potential available to go back on the path of shared prosperity. In that sense, a more accurate analogy would be the postwar era, when the mass production revolution headed towards mass consumption. The measures needed will be as significant as those created back then by the Bretton Wood institutions—the World Bank, the IMF, the gold-dollar standard—, the United Nations, and the welfare State.

 

 
CARLOTA PÉREZ

 

Every crisis is a sort of audit of the economic model at the time. In your opinion, what are the main strengths and weaknesses of the current model?

The main strength is the enormous technological potential available to be guided towards shared prosperity. The main weakness is social tension: on one hand, supporters of an inadequate economic theory rooted in market fundamentalism, austerity, and the small passive state; and on the other, victims of technology, of “free market,” and of globalization whose justified resentment is breeding ground for left and right-wing populist leaders who promise the moon. None of these sides know how to use technological strength, and that’s the main weakness of the current model.

 

 

Must we go back to normality, or drive transition towards a more inclusive development model and a more rational and sustainable consumption pattern?

It would be a big mistake to go back to the previous pattern—which was in no way normal—and lose out on the opportunity to change the course towards a socially and environmentally sustainable model. Systemic measures are needed to guide investment and innovation towards a model of green, intelligent, fair, and global growth. The legitimacy of capitalism rests on: the profits of some, result in benefits for all. When the system moves towards extreme inequality, like nowadays, it becomes unstable and illegitimate. Although at the other end, stability is also unfeasible, as clearly seen in the complete destruction of the Venezuelan economy.

 

 

You’ve expressed on numerous occasions your disagreement regarding the measures applied by Western governments to rescue the financial world after the 2008-2009 debacle. Have we learned the lesson? What characteristics should the rescue plan and government aid for companies in this new situation have?

Instead of a financial system that decisively supports the production economy, we have an enormous casino that makes up synthetic and derivative instruments to finance itself. This creates an inflation of assets which harms those who don’t have any, and impoverishes the masses. Meanwhile, governments are determined to celebrate a recovery—often weak and profoundly unequal—with supposed full employment plagued by precariousness, insecurity, forced self-employment, “uberization,” and, most of all, low and stagnant wages. The pandemic has brought out the meager results of a pure market that has no synergistic consensus direction. I don’t know that we’ve learned the lesson, but governments definitely should.

 

Companies cannot ignore these facts. While they were doing well, although growth expectations for most were stifled, they asked the State to move out of the way. Now that the pandemic has struck hard, they run to it seeking help. It’s important for company aid to be conditioned—as was the one granted by the IMF to countries in debt—and to be framed within a strategy that favors environment preservation, healthcare, well-paid jobs, innovation in a green direction, and so on. Setting this strategy at national and international levels is crucial, and if it’s built with the help of the majority, the result will be even better.

 

You’ve expressed on numerous occasions your disagreement regarding the measures applied by Western governments to rescue the financial world after the 2008-2009 debacle. Have we learned the lesson? What characteristics should the rescue plan and government aid for companies in this new situation have?

Instead of a financial system that decisively supports the production economy, we have an enormous casino that makes up synthetic and derivative instruments to finance itself. This creates an inflation of assets which harms those who don’t have any, and impoverishes the masses. Meanwhile, governments are determined to celebrate a recovery—often weak and profoundly unequal—with supposed full employment plagued by precariousness, insecurity, forced self-employment, “uberization,” and, most of all, low and stagnant wages. The pandemic has brought out the meager results of a pure market that has no synergistic consensus direction. I don’t know that we’ve learned the lesson, but governments definitely should.

 

Companies cannot ignore these facts. While they were doing well, although growth expectations for most were stifled, they asked the State to move out of the way. Now that the pandemic has struck hard, they run to it seeking help. It’s important for company aid to be conditioned—as was the one granted by the IMF to countries in debt—and to be framed within a strategy that favors environment preservation, healthcare, well-paid jobs, innovation in a green direction, and so on. Setting this strategy at national and international levels is crucial, and if it’s built with the help of the majority, the result will be even better.

 

 

The pandemic revealed the shortcomings of a public health system subjected to decades of budgetary austerity, as well as the exclusion that the private provision of health services entails. Do you think a comeback of the welfare State is possible?

I believe it is necessary. The first decades of a technological revolution are driven by the supply of new products and technologies; their golden age, however, is boosted by demand. The welfare State is nothing more than the shape a win-win situation takes between the business world and majorities. As an example, unemployment insurance gave workers security, but it was also essential for the consumer society, based on credit, to work fluently. This would be a whole other story if people were told to hand over the keys to their homes and cars at every economic downturn.

 

Free health and education are also win-win situations. The more educated and healthier the population, the more productive it will be. Moreover, when States cover those essential costs, an increasingly bigger part of salaries becomes demand for goods and services. In the United States, the only advanced country without a public health system, every production apparatus subsidizes the pharmaceutical, health and insurance industries.

 

When facing an ageing society, what taxation models would be compatible with basic income, universal health coverage, and other mechanisms of social inclusion?

Taxation models have two complementary aspects: what taxes are applied to, and who pays them. These are tools to shape the environment where the market operates and, at the same time, a mechanism to provide socially funded benefits. The latter include a business-friendly ecosystem—infrastructure networks, judicial system, education, etcetera—and a redistributive policy that when reducing inequality and protecting the weak, promotes social peace, a fundamental condition for stability and prosperity.

 

In the 1930s, the US business world strongly opposed Roosevelt’s New Deal programs, accusing him of being a communist or a fascist; they rejected tax increases and, like nowadays, they wanted the State out of the economy. The World War II experience was decisive: massive demand from the government enriched companies and allowed them to discover the enormous potential of mass production technologies. They managed to manufacture an airplane every other day. At the end of the war, they understood they needed massive demand. The Cold War took care of one part, but mass consumption was the decisive complement. It was clear that the welfare State was the dynamic demand State. The business world ended up accepting all the state’s income redistribution and job creation programs, as well as high taxes. During the Eisenhower Republican administration, taxes on the higher incomes were kept above 90%. The money went into the hands of the State; from there to the population or procurement contracts, and back to the production world and its profits. A win-win model that must be restored, but adapting it to the characteristics of the current paradigm.

 

An example is basic universal income. As opposed to unemployment insurance, with its huge bureaucracy and the indignity that comes with, it would be a civil right managed by artificial intelligence and ATMs. Those who earn more than a specific amount would return the excess in taxes, so good part of the money (that can be generated the first time through quantitative easing) would return to the tax authority. With the savings in bureaucracy, the decrease in crime, disease, etc., another part would be recovered.

 

The religion of the budget balance always forgets that prosperity is the best way to boost growth. Austerity reduces it. I will take this opportunity to express my disagreement with those opposed to growth due to environmental reasons. With current poverty levels, it would be foolish to stop growing. This can be achieved while reducing the material content in production and lengthening the useful life of products, giving them maintenance and updating them so they can be used for many years and by many people.

 

 

Innovation is at the heart of your proposition, so that in two generations, Latin America goes up to a higher stage of development. Is the window of opportunity still open for this longstanding Latin American claim?

Windows of opportunity are like a moving target: they always exist, it’s just that some are wide and others narrow, some accessible and others not. With the import situation, Latin America leveraged the window provided by the maturity of technologies and by mass production markets of the 1960s and 1970s. It was a very intelligent and peculiar model, based on high tariff protection and low productivity, and also on the import of assembly parts. Its implementation enabled the consolidation of a broad educated middle class, as well as the infrastructure and services required for a dynamic market economy.

 

It also gave process industries a certain level of experience. Unlike manufacturing—where we generally only assemble imported parts—the process industries needed to carry out the complete cycle and adapt it to local conditions, connecting with local production in the agricultural, forestry or mining sectors. This enabled the accumulation of technological capabilities and, on many occasions, innovation. A classic example—among many—is beer, with many decades of innovation. Or the foreign-brand tomato sauce, which had to adapt its process to the shape, size and flavor of the local fruit.

 

The opportunity that import substitution gave us has passed, and the one we have now is different. Asia has already specialized in manufacturing by assembly and we will not be able to catch up with them in that experience, in that knowledge, or compete with their very low wages. But with a lot of natural resources and a relatively small population, Latin America can specialize in processing industries—agribusiness, chemistry, metallurgy, pharma, biotechnology, nanotechnology, etc.—covering the entire spectrum, from raw materials to cutting-edge specialization niches, relying on a growing layer of small high-tech companies.

 

Of course, this specialization doesn’t mean refusing to participate in the assembly industries, especially in the case of Mexico due to its proximity to the United States and Brazil because of their size. All countries would have a variety of industries and services, but with cutting-edge sectors and high levels of innovation, contributing to the tax authority and the generation of foreign exchange. This is what I call indicating a consensus course.

 

 

What will it take for Latin America to go from an employee model for mass production to an innovative micro-entrepreneur one?

There’s no need to go to extremes with this dichotomy. Society requires large, medium and small companies, depending on products, services and technologies. The micro-entrepreneur dream is to become a very big company with many employees. What is required is for companies of any size to stimulate creativity and for everyone—be they bosses, employees or entrepreneurs—to have an innovative attitude.

 

To achieve this, the first thing we have to change is the educational system. If what is taught from kindergarten to university is that questions only have one answer—the one given by the teacher and answered on the exam—then the spirit of independent and innovative thinking is killed. We need to educate in the ability to ask and not have a single answer. Apart from “two plus two is four,” there are many questions with infinite possibilities and you have to learn to find and evaluate them. We no longer have to store all the information in our heads because it’s available on the Internet; rather, you have to know how to look for it and be able to tell what is valuable and what isn’t. It’s another way of learning and it’s important for students to manage their own learning, with the teacher as a stimulator and facilitator. Also, you have to learn to work and research in groups. Education has to be constant, which implies going to and leaving university or technical school throughout their entire professional career. This of course all seems impossible, but the COVID-19 experience has shown that there are other tools for learning and that we can intensify their use. The only thing is that if people don’t become aware of the change and decisive action is not taken, we will never make it happen.

 

 

Why does this leap of development need an alliance between the business world, governments and society?

The first thing we must understand is that growing inequality generates violence, destabilizes the political system, and ends up breaking the social peace. The political system starts to break and populists show up picking up the resentment and rage. The justice they promise results—on many occasions—in economic failure, political autocracy, and—almost always—in kleptocracy. In conditions like this one, the prosperity of a few is not even a possibility.

 

Capitalism is a very peculiar, almost incredible, system. It relies on the idea that if thousands of people freely decide to produce, set prices, buy, educate themselves, invest, and innovate, the result will give rise to a prosperous society in constant growth. What we are not aware of is the common logic that makes the system work, when it works. Each technological revolution is a set of tools and possibilities that share a kind of common logic, what I have called a techno-economic paradigm, a “common sense” that guides our participation in the market, whether as producers, investors or consumers.

 

But each paradigm opens up many options. Mass production was used by Hitler, Stalin, and Western democracies in very different ways. When Mao dressed everyone in the same blue uniform, he was following the same logic Henry Ford used when he said people could have a car in any color as long as it was black. We now have a very different paradigm. In addition to its tendency towards intangible and constant innovation, it offers almost infinite possibilities for variety and adaptation. This hyper segments markets and changes the conditions of competition, opening a wide range of possibilities. It also means that setting the course and promoting synergies is even more important in this paradigm. If every person goes on their own path—now more varied than ever—it will be very difficult for suppliers, technological support, qualified personnel, technical infrastructure, and so many other things that make up national, regional and sector innovation systems to be shared.