An Economy Without Ethics Means a Continent Without Development

The Ten Commandments of the Washington Consensus haven’t worked in Latin America. This reflection by a government official in Guatemala, one of the continent’s most inequitable countries, questions the divorce of economy and ethics and denounces its tragic consequences.

Hugo Beteta

In his small treasure chest titled On Ethics and Economics, published in 1987, Nobel Prize Laureate in Economics Amartya Sen referred to the serious gap that exists between the studies of economics and ethics and demonstrated how it has caused serious deficiencies in contemporary economic theory. Sen argues that people’s real behavior is influenced by etahical considerations and that the science of economics could respond better to the major problems of the new century if it introduced ethical considerations into its foundations.

The first economists:
Profoundly linked to ethics

Classic economics identifies the rationale of human behavior as consistently based on profit maximization and self-interest. Sen argues that there is no evidence that this assumption provides the best approximation to human behavior, or that optimal economic conditions necessarily derive from it. He further analyzes how the supposition that self-interest is the main human motivation has obscured the explanation of phenomena such as interdependence and credibility in economic policy. And he argues that a review of Adam Smith’s complete works does not lead to the reductionist interpretation that has recently dominated economic doctrines and development models.

It is no accident that Sen’s observations about ethics refer us back to the pillars of classic economics of the 17th and 18th centuries, since the first economists were profoundly involved with ethics. David Hume, the famed economist responsible for theories about currency and international trade, was also a philosopher. Adam Smith began his career in the University of Glasgow as a professor of moral philosophy, in a period when this discipline also included theology, political philosophy and ethics. His book, Theory of Moral Sentiments, written in 1749, 17 years before his famous work Inquiry into the Nature and Causes of the Wealth of Nations, attempts to respond to questions such as what virtue consists of and how we should judge human behavior.

As is widely known, Adam Smith made a central contribution to breaking away from mercantilist thinking by demonstrating that private commercial activity has more capacity than the state sphere to produce consumer goods. In his analysis, Smith simultaneously delimits two spheres of human activity: one centered on exchange and self-interest, and the other focused on the principles of state. For example, he argued that commerce and manufacturing do not flourish for long in a state that has no regular administration of justice, where people do not feel secure in the possession of their property, faith in contracts is not supported by law and state authority is not used to oblige the payment of debts by those capable of paying—in short, they rarely flourish in a state in which people have no confidence in public justice.

Adam Smith: Economic logic
needs moral sentiments

In The Wealth of Nations, Smith argues that the eminently acquisitive impulse of individuals produces social well-being through the division of labor and productivity increases. The measure of well-being is clearly material, linked to the increase in production and in returns throughout society. But the dissemination of well-being to all social strata is neither pursued nor hoped for by the economic actors. It is the unintentional result of a natural human impulse. Strictly speaking, Smith presented the essential argument that economic progress benefits all strata of society only intuitively; he does not demonstrate it.
In that same book, Smith emphasizes long-term growth tendencies and not immediate distributive aspects. Smith believed that however much the fraction of the social product appropriated by the upper class might be, the growth of the productivity of labor would leave a lot of the product for the workers. He thus endowed the system with its own logic that comes close to daily human experience.

Nonetheless, in his book Theory of Moral Sentiments, Smith adds that the desire to merit the approval of others leads people to moderation and self-control and to socially elevated, even altruistic attitudes. His contributions in this work explore the connection between moral sentiments and economic behavior. Smith’s notes, discovered in 1958, and the additional work he did before dying on Theory of Moral Sentiments contribute to a greater coherence between the two works. For example, Smith introduced the principle of self-control into his last revision of Theory of Moral Sentiments, long after having published his acclaimed work, The Wealth of Nations. In addition, Smith suggests in his notes that these two works should never be read separately, because in his vision they need each other.

From the “invisible hand”
to “trickle down” economics

The intuited invisible hand, which is only mentioned once in The Wealth of Nations, frees up economics and confines ethics to the personal sphere. That economic cosmovision suggests a profound conflict: what are the limits of experiments to transform the conditions of human existence if the economy is governed by an invisible and impersonal logic, a natural law? The effective de-linking of an individual’s ethics from social well-being justifies a certain immobility, in which attempts to transform the world clash with economy’s “natural” character and with the very nature of individuals.
This interpretation also touched on other fields. In his “Essay on Population,” Thomas R. Malthus appealed to the undeniable human impulse to reproduce and the land’s limited capacity to expand the food supply to thus justify subsistence salaries. Ricardo’s “law of diminishing returns” was also used to justify the social conditions reigning among agricultural workers of the time. It was not for nothing that economics at the end of the 18th century was known at as the “lugubrious science.”
The more holistic approach that Smith attempted to reconcile through all of his work did not alter the dogmas transmitted through the generations. The evident comple-mentarity between the two is replaced, even today, by the fallacious myth of the evolution of the young, moral, idealist Smith who wrote the Theory of Moral Sentiments into the realistic and pragmatic author of The Wealth of Nations, today elevated to an intellectual marvel in the economics field. Self-interest and the premise that the benefits of economic growth will “trickle down” by virtue of Smith’s “invisible hand” have become the essential self-identifying features of the global economic cosmovision at the beginning of the 21st century, while his Theory of Moral Sentiments has been virtually forgotten, despite the fact that Smith himself considered it his most important intellectual work.

The ten commandments
of the Washington Consensus

In 1989, economist John Williamson drew up a list of ten recommendations that reflected the ideas inspired by the classic liberal economists working in the US Treasury Department, the International Monetary Fund and the World Bank. It is not odd that their author would call his recommendations the “Washington Consensus,” that they would be enthusiastically embraced in development circles or that from that time forward no country would obtain support from these institutions without agreeing to the “Consensus Decalogue.” Some years later, Williamson made an effort to clarify the limitations of his recommendations, but no one paid any attention. The “Consensus” had already become the official global development policy.

The “Decalogue” involved eliminating subsidies, expanding the tax base and reducing tax rates, deregulating financial markets, setting a “competitive” exchange rate aimed at boosting exports, liberalizing trade, reducing customs duties, stimulating direct foreign investment, privatizing public businesses, deregulating to inhibit corruption and stimulate smaller companies, and strengthening property rights.

Latin America: Three waves of reforms

Latin America navigated through three wide-reaching waves of reforms inspired by this Consensus. The first coincided with the negotiated transition from military regimes and began with stabilization and structural adjustment programs that slashed social welfare programs and prioritized payment of the foreign debt. These programs were intensified with the second and third generation of reforms as a response to the failings already evident in the model. At the end of each period, economic crises and corruption scandals abounded, culminating with Argentina’s crisis in 2001.

For all that, we must be fair: these policies achieved important objectives. Inflation was soon beaten back, although Central Banks still obsess over it. The debt crisis was overcome and public budgets were balanced. All this corrected the disastrous public finances and huge macroeconomic imbalances.

The strongest critique of the reigning economic model came not from academia, but from reality itself. The “Decalogue” combined insufficient and erratic growth with intensified inequality in many countries. The reforms often eroded the state’s basis for legitimacy. In Latin America, only three countries (Argentina, Chile and Uruguay) grew more rapidly between 1980 and 2000 than in the previous thirty-year period of 1950-1980. Yet, even two of these countries—Argentina and Uruguay—are today floundering in deep crisis; only Chile appears to be a successful case of sustained growth. With each new wave of reforms, Latin America’s profound problems became increasingly evident. The crises of Ecuador, Bolivia and Peru, where the economic growth has begun to turn around, suggest a more profound crisis of the state.

Worsening income inequalities and intensified economic insecurity have accompanied Latin America’s terrible economic growth record in many countries. The crises of Mexico, Brazil and Argentina revealed the volatility and insecurity dominating the region that adopted the neoliberal model most enthusiastically. At the end of the decade, Latin America still showed greater inequalities in the distribution of income and assets—land included—than any other region of the world.

In most Latin American countries, reducing the size of the state did not increase social well-being. The state went from one many considered inefficient and corrupt—albeit efficient at using public power to benefit private interests, forgetting social welfare and the public good—to one restricted to protecting property rights and contracts, favoring electoral democracy while denying the population access to information, justice and the arenas it needs to achieve genuine participatory democracy and full citizenship.
The ethnic question, the horrendous distribution of wealth, the external vulnerability, the chronic institutional insufficiency and the fragility of national savings in themselves question the capacity of the “Decalogue” to deal with the challenges of our region’s history. We now know that we cannot adopt a system in which macroeconomics and public finances are treated independently of the structural, social and human aspects of our societies. The problem, according to Rodrik, lies in the fact that “an economy was designed without understanding the institutional underpinnings and thus the IMF proposals were aimed at societies that did not exist.”

The model’s assumptions are not being fulfilled

Some argue that the flaws in the past decade were due to timid application of the neoliberal reforms, the countries’ limited appropriation of them and the poor structures of governance. But reality obliges us to question some of this model’s assumptions and their uniform application in such diverse societies.
The obviously unequal opportunities—due to heredity, ethic membership or gender—contradict the assumption of perfect competition. In a world dominated by huge corporations, Latin America’s markets are almost never competitive. The extreme differences in access to productive assets—land, education, financial capital—and to information and knowledge only accentuate the inequalities. The majority’s lack of purchasing power inhibits the development of an internal demand that would permit an economic growth less exposed to the volatility of the external markets.
The global economic rules redistribute income to those who already have the technology, knowledge and other production factors, while the governments of the industrialized countries maintain direct, tariff-based or regulatory subsidies that impede free access by the poor to produced goods.

The carbon emissions produced by the advanced societies of the North translate into climatic changes and environmental disasters that represent real costs to our countries’ homes and businesses, without these costs being internalized by the business activity.

Toward a human economy:
From assumptions to values

We must not understand these realities as the product of a conspiracy. The explanation goes much deeper. The theoretical fuel to propel the dominant economic order originated in a particular reading of the classic liberal economists and the separation between ethics and economics has been institutionalized in a social practice that now touches us all. As the 1996 Letter of the Latin American Provincials of the Society of Jesus says: “We are being pushed dangerously toward a culture that radicalizes the ambition to possess, accumulate and consume, and replaces the realization of all people with individual success, making the common good disappear as the central objective of politics and economics.”
Institutionalized, often subliminal mechanisms seem to be sending us a single message: there is no alternative to the status quo. Nonetheless, each advance in history has first conquered the notion that progress was impossible. The end of slavery and of open colonialism, the struggle for universal suffrage and for racial and gender equality, respect for the environment and for human rights all indicate to us that a renewed economic order is possible.
This renewed order must create opportunities for sufficient income for all, generate enough resources so that public institutions can exercise their responsibilities and promote the common good, and permit economic participation to achieve effective citizenship for the majorities. Such a renewed order will only emerge from the convictions and beliefs of the people who make up the businesses, governments and households, and will probably require an inter-generational vision. Therein lies the importance of education in values.

Economic growth does not
automatically reduce poverty

Guatemala’s National Poverty Reduction Strategy opens with this: “Guatemala’s most serious economic, social, political and ethical problem is poverty.” That poverty reveals a model unable to fulfill its essential task: to allow people to achieve plenitude.
Logic would seem to indicate that poverty reduction programs could contribute to faster growth and that growth “is good for the poor as well.” But the contribution of growth to poverty reduction is not automatic: it must be accompanied by a change in income distribution. If two countries initially have inadequate distribution structures, poverty will be reduced more in the country that improves its income distribution scheme the fastest. If it does not improve, a country’s economy can grow at relatively high rates without having any positive effect on poverty, as is frequently the case in Latin America.
Recent World Bank studies in Guatemala estimate that poverty fell from 62% of the population in 1989 to 56% in 2000. But everything suggests that the growth did not especially favor the poor since it did not reach the rural areas with the same force. These studies demonstrate that progress in reducing poverty would have been greater with improved distribution of income and assets. Economic growth without distribution improvements is not sustainable over time, since extreme inequality erodes the very institutions that sustain the economic activity.

Being indigenous means being poor

Some 79% of Guatemala’s poor are “chronically” poor, people who have lived in poverty for long periods, even generations. They do not automatically benefit from opportunities for growth because they lack assets and live in places far from where the growth is occurring (a full 90% of Guatemala’s extremely poor people live in the countryside). These poverty levels are not only associated with the geographic distribution of opportunities and lack of access to productive assets, but also to the lower prices and returns that the poor receive for the fruit of their labor, often as a result of open discrimination.
In Guatemala, being indigenous means being poor: 76% of the indigenous population is poor compared to 46% of the non-indigenous population. The root of this poverty is in our history and in the institutional options for dealing with it. Indigenous peoples traditionally work communal land without emphasizing “ownership” of it in the occidental sense. The land record institutions ignored this reality, choosing an institutional property rights concept that is outside the culture of the majorities, permitting a great despoiling of assets over history that limited indigenous peoples’ economic citizenship. The vast majority of indigenous people found themselves forced to work at the service of other “owners.”
But Guatemala’s labor structure has been plagued with even balder discrimination than that. In the 16th century, the encomienda system obliged indigenous people to pay tribute through their labor to individuals close to the colonial administration. And in the 20th century, the Vagrancy Law obliged landless indigenous people to work on private plantations 100 days per year. The history of Guatemala’s institutional labor options was an assault on indigenous peoples’ dignity. Today, indigenous emigrants are encountering yet another kind of discrimination in the North.

Include indigenous people,
particularly indigenous women

Firm opposition to racism and ethnic exclusion is one of the pillars of the new economic order that we can envision. The International Labor Organization’s Convention 169 on Indigenous and Tribal Peoples in Independent Countries establishes that indigenous people “shall have the right to decide their own priorities for the process of development as it affects their lives, beliefs, institutions and spiritual well-being and the lands they occupy or otherwise use, and to exercise control, to the extent possible, over their own economic, social and cultural development. In addition, they shall participate in the formulation, implementation and evaluation of plans and programs for national and regional development which may affect them directly.”
It is virtually impossible to support indigenous peoples’ economic development without a national system of legal norms that recognize their existence and their rights and unique cultural and linguistic characteristics. Thanks to political initiatives of indigenous peoples themselves, there has been a virtual judicial revolution in many Latin American countries with respect to constitutional recognition of their rights. This task is still pending in Guatemala.
We also need to pay greater attention to indigenous women’s access to productive assets. There is strong awareness of the importance of women’s access to intercultural education, but much less to that of laying the economic and fiscal foundations for improving access to land, housing and work for female heads of household, who today assume many of the costs of the internal armed conflict and the international migration dynamic. Guatemala could learn a lot from the initiatives to improve the business capacity and competitiveness of indigenous businesses—be they collective, family or individual—that dot the western part of the country like fireflies. Fighting the discrimination suffered by the products that contain the fruit of indigenous labor—evident in the highly protected global agricultural markets—should be made a priority of Guatemala’s foreign trade policy.

Another essential challenge for achieving ethnic inclusion consists of learning from the institutionality of their own common law and seeing how the solid economic principles—protection of property rights—put forward by Smith and clumsily applied by the Washington “Decalogue” are respected in it.

There will be no development
without economic citizenship

I believe that the essence of Guatemala’s transformation resides in achieving effective exercise of economic citizenship for all, because the great flaw in our economy is that its efficiency has been mediocre and exclusionary. The generalized poverty reveals a model that has been unable to fulfill the essential task defined above: to permit people to achieve plenitude. An economic system’s capacity to include all in its benefits must be the measure of its true effectiveness.

We have very little consciousness that all Guatemalans are economic citizens. The market economy creates a space for individual liberty, but only those with purchasing power can enjoy it. Those without have very limited liberty and thus very limited citizenship. If the market is the principal arena for participation, those who do not possess goods will be marginalized or often totally excluded from political participation, social organization, formal work and life in society. Effective economic citizenship must be erected as a pillar of the struggle for human rights.

Accepting the importance of this citizenship implies recognizing that business goals must include more than only the stockholders’ interest and that the business itself is not a machine run exclusively to obtain material benefits, but is a group of human beings who propose to satisfy human needs with quality. So far, economic morality has centered on individual duties and on the personal motivation of the action, not on the results. We need a business ethic whose ultimate result, without excluding the benefits to stockholders, is the greatest possible good for all. We need to expand the sphere of the needs that the business activity satisfies from that of consumer goods and services to other needs such as job creation and improvement of the ecological and social surroundings. The “Laborem Exercens” encyclical is clear in this regard: recognize work as a fundamental human right for its social, political and spiritual meaning and remind ourselves that it is not just one more input into production.

Work is at the heart of human dignity

To accept that it is impossible to provide jobs for all those who want to work is to ignore the epicenter of Guatemala’s social problematic. The lack of income and work is the main cause of poverty, and especially affects the most vulnerable people, those who also face discrimination and live in situations of environmental risk. In addition, the increasing mass of unemployed and underemployed people makes work precarious by inhibiting organization and labor formation.

For the vast majority, work is still the main means of life, the foundation of personal identity and an irreplaceable form of social participation. Unemployment and lack of income carry with them major economic, human and social costs that affect us all. Unemployment inhibits the development of the domestic market, which is vital to the generation of fiscal income and is crucial both to national businesses that will never export and to social stability and cohesion. Unemployment erodes confidence and self-esteem, creates a loss of personal identity and hope and induces severe restrictions to social life. Its result is isolation and frustration and could degenerate into violence, drug use and the destruction of family life. Human participation in the divine creation through work is at the heart of the notion of dignity. Work, in sum, is much more than a production input.
Just as social security in Guatemala was the central objective of social policy in the forties, employment must take its place at the center of national social policy today. We need a labor policy that is compatible with the ever-increasing flexibility of businesses and with the trade opening, keeping sight of the fact that work is both a means and an end. In the past, Guatemala was able to gear up to greater production. Now it also needs, and urgently, to gear itself up to greater employment levels through an active national industrial policy.
Establishing higher employment levels is not simple, but discussing an employment policy presupposes a very important step of recognizing its absolute priority. The transformation of the world of work requires profound changes in national education, especially at the level of labor skills. Employment policy must also grant priority to the defense and creation of national job posts in response to the free trade agreements and to a relative increase in the weight of wages in national income.

The challenge: A dignified job for
every youth who enters the job market

It has been demonstrated that sustained increase in business competitiveness does not depend on reducing salaries. It cannot be rightly claimed that the lower the wage, the more productive the worker will be. What determines the success of a business is not the price of labor, but the productivity of the whole business. A technological improvement can increase productivity, but only if there are employees who know how to extract the appropriate yield from the technology and feel themselves part of the company. The countries with the highest social protection and labor formation are precisely the most competitive.

It is not only the government that must put active job creation policies into effect. So must the businesses, municipalities and different social networks that reach all of society. The challenge is to offer a dignified job to every youth who enters the job market. In Guatemala, only 10% of the young people who enter the job markets find formal employment. This challenge must occupy the attention of the most creative business leaders, the universities, civil society and the public sector. Supporting the task of creating jobs and a more favorable macroeconomic setting for employment means encouraging a decided employment policy that can resolve this national problem.

To the growing interest in technology, we could add interest in the education of labor, to make workers’ skills compatible with the requirements of the world market. Nonetheless, education must not be reduced to acquiring labor skills but must also address the capacity to use them in the framework of the citizenry’s ethical values. And to these efforts we would have to add the imperative of effective incorporation, which translates into jobs integrated into social security to permit workers’ ongoing acquisition of assets, including education, land and housing. This is the surest way for all to benefit from the economic growth opportunities without exclusion. Inserting indigenous people and women into the labor markets in equal conditions and eradicating exclusion from those markets are challenges imposed by our country’s history.
Guatemala’s most recent history imposes yet another national challenge: to rescue the systems of institutional checks and balances to induce a generalized scrupulous behavior among the social actors, especially in government, resuming the path of constructing social capital that culminated with the signing of the Peace Accords.

Confidence in institutions and in public servants

Social capital, understood as the “set of characteristics of social life that permit citizens to pursue common objective with high effectiveness,” is an indispensable ingredient for dealing with Guatemala’s problems. The countries where social polarization is lower and institutions exist that restrict government arbitrariness not only have a better quality of life but also greater economic growth and more effective public administration.
Systems of institutional checks and balances are essential to induce scrupulous behavior in public officials and other social actors. This is the area that I believe has suffered the greatest erosion in Guatemala in recent years, and where it is essential for the economy to recover ethical order.

Scrupulous behavior and open and transparent administration generate the confidence that permits the government to follow public policies whose results require long-term efforts. Generalized confidence further translates into lower transaction costs for the citizens and better market functioning. In addition, it permits the civic networks and public sector entities to jointly pursue greater objectives than could be pursued separately. In Guatemala, the Fiscal Pact will permit the vision included in the Peace Accords to be taken up with determination. I believe that the government should also favor negotiated wage policies, avoiding decreed wage hikes insofar as possible since they rapidly erode the climate of confidence built during the worker-boss negotiation.

The government’s capacity to restore confidence critically depends on the citizenry’s perceptions of how scrupulous, competent and committed to the common good we public servants are, putting it before individual, bureaucratic or party good. Officials who abuse or have abused the public trust inherent in their posts must be punished and the illicit networks encrusted in the institutions must be combated head on. To this end, it is also important to restore public administration, often cannibalized by the government itself and sometimes, involuntarily, even by international cooperation.

It is also essential to restore the effective protection of human rights to create a “climate” that permits social “re-capitalization” in Guatemala. The institutions that guarantee the country’s democratic institutionality are depositories of national social capital, accumulated with great effort after the exhausting internal confrontation. Strengthening them is an undelayable ethical and economic imperative.

Another social order is possible

The classic economic interpretation of people as individuals who always tend to maximize profits and do so exclusively through consumption is not true. The notion of people’s well-being as centered exclusively on themselves and on consumption is countered by parents who delight in the welfare of their children and by friendly countries that support us by sharing their savings in solidarity with us.
The notion that people can pursue their goals autonomously, without interdependence on others is countered by what we now know. The carbon emissions in the North are demonstrating the great global interdependence. Tax evasion can translate into an institutional crumbling that ends up creating a chaos of insecurity and social tensions from which no one in the country can escape. Ethics influences personal behavior and can help us imagine a different social order, with a more economically effective citizenry.
Is economics still a “lugubrious science” three centuries later? Classic economics has been able to illuminate complex questions of social interdependence despite the indifference shown toward ethical issues and the reductionism applied to human behavior and social institutions. Using general equilibrium theory, Amartya Sen showed that starvation has little to do with the food supply and a lot to do with demand-side relations of interdependence. Abstract economic models have major practical relevance, but they could benefit greatly from the ethical considerations that condition human behavior and its institutions.
The market alone cannot determine how to distribute society’s resources. It needs a state with a strong and fair system of justice to be able to operate well. The solutions point to principles, not to predetermined institutional arrangements, as demonstrated by the Latin American experience with the Washington “Decalogue.”
This does not mean that no economic behavior model will be useful unless it introduces all these complexities. That would be to reject a good part of economic theory and its great possibilities. But adhering strictly to the narrow assumption of self-interest leads us to allow only a very narrow gamut of social relations, and to the achievement of very poor results from public policies. Assuming a closer relationship between ethics and economics brings us face to face with difficult questions, since it puts our values in evidence.
Can we imagine a day in which solidarity and commitment to notable causes, loyalty and altruism will be part of the orthodox economic models? I would like to believe that some of our younger students have imagined an alternative world tonight, without discarding the rich store of economic sciences, and will be attracted to constructing it from here on out.

Hugo Beteta is the new Guatemalan government’s general economic planning secretary. This was his inaugural lecture in the Jesuits’ Rafael Landívar University, Guatemala City, Febrcwuary 2004.

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