What this book is about and why it may be relevant

1The purpose of this work is to formulate a hypothesis regarding one of the likely reasons why developing economies cannot develop and usually get caught in what the literature has called “the middle-income trap”. It is the case of countries that manage to grow for a while and then either get stuck or start getting poor. The hypothesis is simple. The urbanization processes that have been taking place in developing nations since the nineteen fifties have formed part of what is known as annual flow of wealth creation. However, once the markets involved in activities related to the construction of cities and infrastructure get saturated, the possibilities of replacing the value added by them with other activities are very low in most cases.

2The stagnation of construction industries goes hand in hand with the destruction of the human capital they created in their most active stage. This was a type of human capital that did not need important qualifications or educational investment in order to achieve some material progress, the first urban descendants of parents of rural origin, or the second generation of poor urban inhabitants. They faced a dual situation. For better or for worse, they were born in a more opulent context than their parents, but with fewer opportunities for successful insertion in society, and they did not preserve or acquire the work habits typical of rural life.

3The pace of technological and productive transformations gets increasingly faster, and the training necessary to get a reasonable job in such context cannot keep up with that pace, even less so in the cases of the children of parents with a low schooling level. In turn, technological innovation may not be enough, or may even be a trap preventing improvements on the average productivity of an economy. The reasons for this, which will be clearly explained in these pages, may be summarized as follows.

4To begin with, most of the developing nations do not have enough capacity to generate innovations. This is so because of the asymmetries created between developed countries and the rest of the world in terms of prior learning, equipment, investment capacity and human capital. Besides, the presence of the headquarters of transnational firms in those nations meant the implementation of quite narrow industrialization and innovation patterns.

5Nowadays there are two dominant views in the literature to explain the world situation regarding economic difficulties and development disparities across nations. One of them, merely distributist, sees the golden age of twentieth century Capitalism as a real exception in a world in which inequality has always been present. This is why the growth of such inequality in the twenty-first century is almost inevitable in the absence of large institutional or revolutionary transformations. A clear example of this may be found in Thomas Piketty’s1 highly influential 2013 work, Capital in the Twenty-first Century. The other view emphasizes the extractive nature of public and political institutions as the main cause of the failure of certain developing nations. Iconic of this view is Daron Acemoğlu2 & James Robinson’s3 2012 book Why nations fail, which, like the one mentioned above, has been read all over the world. Both views – by authors related to the Massachusetts Institute of Technology – and their theoretical frameworks seem to ignore certain basic facts and tell an incomplete story, if not directly biased, which is an obstacle to understanding the problems of the developing world from a more specific perspective.

6The problem is not just that wrong diagnoses may lead to poor public policies, but also that the theoretical debate turns out to be very poor as well. Indeed, debates on macroeconomic policies seem unrelated to those on sustainable development, the latter aspect seemingly comprising only the environmental dimension. The topics are discussed outside a context, or rather a certain context dominates the discourse. Such approach ignores the evolutionary nature of socioeconomic systems and the fact that this process involves terms of different durations. Thus everything has turned confusing, fragmented and formalizations of the economy occur on the basis of preconceptions built on much simpler realities, almost non-existent today.

7At the same time, simple recipes as will be suggested here will, no doubt, clash with prejudices of all kinds. The suggestions have to do, for example, with designing redistribution policies linked to value chains for the creation of sustainability in urban contexts by means of mass employment requiring low initial qualifications. The prejudices will surely be that this is equivalent to subsidizing unemployment, or that it will inevitably lead to low productivity. Why should we employ labor force for processes that technology may save us from paying for, thus liberating resources to keep growing? For instance, why employing a lot of labor force for parking control in congested cities if this activity may be automated? Why employing labor force for park and street maintenance if this labor force could be assigned to more profitable activities linked to new technologies? This will be answered in the following pages, and the argument is really based on a very specific fact: neither physical nor human capital can easily be substituted for in short terms. This affects the basic assumption regarding the mobility of the factors, which, for the same reason, undergo mutations and their attributes change as time goes by. Even in countries belonging to the Organisation for Economic Co-operation and Development (OECD), for instance, the level of capital formation contributed by the construction of private houses and public investment (or basic infrastructure) accounted for around 50-60% of the national investment between 1960 and 1970, whereas towards 1990 and 2001 that amount was reduced to barely a third4. The difference in those countries is that private investment in sectors other than household kept growing, but precisely because of its advantages in terms of innovation and control of global and financial markets. And this is something that most of the countries cannot imitate, dispute, replicate or substitute with private activities absorbing employment.

8The core idea is, then, that if activities related to urban construction are recycled into the construction and reconstruction of sustainable cities as one of the basic sets of new activities on a global scale, it would be possible to solve the problem of structural unemployment to a large extent. Thus in developing nations, sustainability requires the implementation of technologies, but also of continuous processes of repair, maintenance, landscaping and other tasks intensive in low-skilled labor. These activities related to urban maintenance and the transformation of cities will then guarantee that sustainability will cover all the scope of its dimensions: the right of future generations to have natural resources and a preserved environment, but also to be certain they will be able to incorporate themselves in the labor market and thus increase their productivity. That is, the concept of sustainability includes the respect for the right to life and to a certain material progress. This certainly makes innovations and investment affordable for countries with lower relative development and fosters sustainable consumption to a level that is at the same time sufficient and dignified.

9Some will, surely, see this proposal as a new justification of John Maynard Keynes’s ideas, or as a “copy and paste” version of the “New Deal”. Others might consider it an underhanded attempt to reformulate Socialism in the twenty-first century, or as an impossible utopia; some others will object to the world-scale fiscal agreement that is implied, and of course some will accuse the author of trying to justify Capitalism and will ask him to be reasonable for the sake of his own survival. And this is so because, precisely, though the arguments suggested here do not belong in any dominant line of thought, it is also true that they cannot ignore the basic issue that people’s willingness to pay for public goods conflicts with their willingness to pay for private ones. Neither can they ignore the fact that this conflict can only be settled in the field of politics. This has been analyzed by Hanna Arendt, who defined politics as something specifically devoted to recognizing the uniqueness of each human being.

10It cannot be ignored either that it is not possible for politics to solve economic aspects by itself and that the specific way of facing those “economic” aspects will necessarily be tainted by the body of knowledge contributed by the vast corpus of the economic sciences. But apart from all this, economics as a science is not completely autonomous with respect to the world of values and of the interpretation of the value that each human being attaches to other human beings and how general well-being may depend on this.

11Analyzing such complexity would no doubt lead us beyond the scope of this work, for it would trigger a serious discussion about the different views on what the human being really is, what motivates people’s behavior, the incidence of the biological and cultural backgrounds on evolutionary processes and other related issues. Yet it is not by chance that these questions emerge now, after almost seven decades of global economic expansion, when in times of prosperity it seemed even unnecessary to formulate them.

12Indeed it is in times of deep crises, that the political, economic and social hive is usually shaken up. And if no new ideas or approaches crop up, it is most likely that there will be loads of analyses, recipes, opinions and controversies which, in general, are more of the same (or slightly different versions of old recipes). It is just logical; it would not be a time of deep crisis in the field of reality and of the prevailing ideas otherwise. This is a dangerous situation for it brings about futile debates which in turn lead to fluctuating policies and ideological preferences, and this hinders the consolidation and maintenance of well-being with some level of equity and sustainability. Sometimes this debate gets off the narrow path of corrections of macroeconomic policies, as is the case between those in favor of adjustments in public accounts and those against them – generally in the field of monetary and fiscal policies. Then two opposing paradigms prevail.

13On the one hand, there is the suggestion that a radical change in the system is necessary – by the way, an imprecise, ambiguous and many-sided definition. On the other, there is the false belief that policies placing a greater emphasis on market mechanisms and individual and corporate creativity will ensure a growth path once the crisis is over. And that this will finally reflect what each one, each nation and the world as a whole are capable of reaching according to individual and corporate merits, and to a sort of unique recipe regarding the necessary improvements of political institutions. The debate, then, ends in anti-capitalist trends – which may or may not relate to the Marxist thought and its inexorable vision of the end of capitalism –, or in a repetitive recipe of policies aiming to correct something vaguely defined as market failures. This debate has not moved forward significantly over the last hundred years either, and experiences in real socialism have not been successful enough to survive, except in those cases in which individual liberties were suppressed in different degrees, and standards of living were such that many would consider unreasonable in view of the opportunities that technological progress and human knowledge offer today. Nor has there been a deep self-criticism of such real socialisms. Their fall has certainly been the consequence of political, economic and planning failures, as well as of the influence of a proactive ideology which exacerbated the virtues of the free market and considered state interventions pernicious. The debate has then become unnecessarily obscure because, in general, it is always possible to try to reach relative objectivity based at least on some empirical evidence5.

14In contrast, believers in the pro-capitalist mainstream thought or in neoliberalism still rely on the strengths of a self-regulated market, though its purported virtues have been strongly criticized after its failures since 1990. In spite of his ideological and theoretical shifts, Joseph Eugene Stiglitz6 is a paradigmatic representative of those critical of that view. However, this critique of the failures of self-regulated markets has become more intense both at the popular level and in different theoretical approaches pointing to the weakness of the neoclassical approach. Such weakness has certainly been difficult to refute; yet, this approach has strongly prevailed, to the point that the concept of democracy itself has been gradually related to that of the free market. Though this ideology became weaker after the 2008-2009 crisis, it is far from defeated.

15Consequently, the theoretical field as well as that of concrete policies is fruitlessly fragmented. And there are very few attempts to rethink the Global Agenda for Sustainable Development from a perspective different from that of the institutions created at Bretton Woods. Ultimately, the view put forward by the institutions belonging to the United Nations system prevails, a view held by the new world order of the second half of the twentieth century. Such world order, carefully and methodically articulated around the concept of sustainable development, at times poses serious inconsistencies, which a certain rhetoric only manages to conceal. And the implementation of its recommendations and instruments does not bring about a solution to one of the most pressing problems of the twenty-first century, that of employment and equality.

16Although these problems feature in the discourse nowadays, the underlying idea is still that market mechanisms plus some level of State intervention might solve them by means of timely and well designed policies. And this might not be wrong. But the emphasis is mainly placed on issues such as the environment, gender equity, the role of the civil society and of indigenous communities, rather than on the sustainability of the creation of product flows that will absorb job demands by the young and future generations needed to reach decent standards of living. The problem of poverty and urban marginality is scarcely dealt with in an explicit manner, and is frequently considered a housing problem, not related to the logic of modernization, urbanization and the operation of the productive system. An exception to this may be some recent World Trade Organization (WTO) reports on industrial policies and employment. However, their conclusions are not firm enough, nor do they reflect clearly the relation between these issues and other aspects of sustainable development and the set of policies that these bodies propose.

17After the recent downturn in the growth of the global economy – and after the world enjoyed for the first time since “the golden age of capitalism” an unprecedented period of prosperity7– the old and always lurking phantoms of growing unemployment have now come under the spotlight again, stronger than ever. On the one hand, most undeveloped nations still depend strongly on the world demand for some type of raw material or natural resource. On the other, the fall in the price of such commodities may slow down processes such as re-industrialization, growing service supply and expansion of public spending and investment, activated after 2003 in an important number of countries which thus managed to improve their human development levels and their possibilities to create new wealth. Also, though not in all cases, a more efficient distribution and greater equality were recorded in that period. However, those levels were not enough to reduce extreme poverty, the growth of slums and urban and rural marginality. In these cases, the recent fall in the price of raw materials – whether mineral, energy, food or other types – threatens to slow down those improvements.

18As a consequence of the above, strong fears are generated that new and irreversible processes of human capital destruction will again speed up the creation of huge pockets of poverty with inter-generation consequences difficult to revert. Such a scenario will easily result in violence, corruption and social disintegration, which in turn will worsen the processes that started at the end of the 1970s. A geopolitical redefinition is also perceived, which tends to force the return to a uni-polar world that would reduce even more the possibilities of reaching sustainable, inclusive and more equitable development.

19On the other hand, in many developed countries, and particularly in European developing ones, job creation is scarce or even negative. The Spanish, Greek and Portuguese cases, among others, have been paradigmatic. Solutions to this problem by financial institutions such as the International Monetary Fund (IMF), the European Central Bank and others have been highly inflexible and improperly orthodox, mainly as a consequence of the world-scale influence of the international financial system. An example of this is the fact that only a quarter of the Greek rescue package is devoted to investment, which clearly shows that the priority is, at best, to put the macroeconomic context on a sound footing in the belief that this will in turn lead to new investments triggered by market mechanisms. Others may see this as a new surge of wealth concentration led by the richest countries, or rather by the elites in those countries.

20But at the same time, monetary expansion policies – recommended by neo-Keynesian approaches – must face both domestic inflationary problems and the achievement of competitive exchange rate parities, for nowadays, each economy depends on foreign trade exchanges to a greater extent than thirty, twenty or ten years ago. Reaching a reasonable level of prosperity within a closed economy is currently a difficult option, but it is also difficult for most nations to achieve a favorable insertion in world trade. It is hard to sustain the convergence process that started in 2003 and that began to falter after the 2009 crisis and even more towards the end of 2014 in many emerging economies and in others that had benefitted from that newly golden context.

21When monetary policies are dependent on a unique currency, as in the case of the European Union (EU), the levels of freedom are significantly reduced, and the only way out is indebtedness. Political negotiation plays a key role at this point, to prevent not only social turmoil that might turn uncontrollable, but also a decline in the demand for products from industrialized countries such as Germany and France, which might transfer the adjustment to the rest of the bloc. But indebtedness requires collateral, and this poses two questions: what kind of collateral can be offered in a world where the concentration of property is already high? And which would be the horizon of such mechanisms to solve the main underlying problem?

22This new world has thus generated the conditions for two powerful industrial forces to prevail, both with different levels of control over the global world: the United States and China. But this does not mean the world is bipolar or even multipolar.

23The American financial crisis was undoubtedly preceded, as will be shown below, by a slowdown in machinery and equipment imports that China demanded from industries in the developed nations. Yet, it has certainly helped the United States to turn their currency back into the only reserve currency in Central Banks around the world. Those who kept a portion of their reserves in Euros lost about 30% of their value only between 2008 and 2015, which has obviously discouraged the world demand for that currency. Although the dollar has also devalued since 2008 to levels difficult to estimate precisely8, it is still – as after Bretton Woods – the only reserve currency demanded globally. Therefore, though Chinese economy is nowadays the world’s strongest after that of the United States – and it is uncertain whether it will be stronger a few decades from now9 –, the Chinese Yuan will hardly threaten – as was the case with the yen in the past – the American privilege of being the only country with no important restriction to issuing currency without necessarily producing a significant level of inflation. This unique role, together with an almost unlimited military supremacy based on new and powerful technologies, renders an economy with serious structural problems and huge indebtedness the leader of the international financial system. A leader than can impose and monitor the path and characteristics of development in many countries, not to say in the whole world.

24Consequently, this situation, which seemed to relax temporarily between 2003 and 2007, seems now to be again one of the main obstacles to reaching a reasonable convergence between developing and developed countries. Strengthening deregulation policies for more markets is only a step away. New trends have already appeared in transport services based on telecommunications, as is the case with the Uber application, for instance, which can favor consumers but at the same time decrease average incomes and increase the most concentrated ones. Similar situations are recorded in other service sectors, such as the new cultural and advertising industry, which is anchored on networks started by third parties and generate concentrated incomes worth millions with very low levels of investment, re-investment and creation of jobs with stable salaries.

25China, the second strongest world economy, is in turn very likely to keep growing, though to a lesser extent than in the last decades, as a consequence of the fact that its growth – as will be explained here – has depended on two main factors. The first is its exports to the rest of the world after it became a member of the World Trade Organization (WTO) in 2001. This landmark turned the country into the factory of the global world because of its labor training, its availability of engineers and technicians, the cost of labor and foreign investments. The second factor is the country’s urbanization process, which started before and also took place alongside its industrial modernization. As will be argued here, this latter aspect has triggered both domestic growth and the demand for all kinds of raw materials, consumables, machinery and equipment from the rest of the world.

26However, the dynamics of these urbanization processes tends to create a structural overcapacity which is preceded by the decrease in absolute value of the flow of new migrants from rural to urban areas (Kozulj, R.: 1997, 2001, 2005). Although if centralized policies such as the hukou10 system persist, the excess migration process might eventually be reverted, this would only prevent the formation of slums in Chinese urban areas – which has occurred in all cities in the developing world –, but it would not imply the generation of better incomes for the people involved in those processes. This would mean, to some extent, going back to former Maoist policies, which were precisely disregarded over two decades ago.

27At the same time, it is almost evident by now that the world has come to a stage of trade and currency wars in order to try to sustain its growth by means of exports, a game that is no longer non-zero-sum, since the synergies of the 2003-2007 period seem to have been exhausted. In a world with no growth, under the present structures, rules and institutions, what some gain others lose. On the other hand, expanding markets to see to those who still have not had access to basic levels of fulfillment of needs requires either a smaller surplus, or the generation of new flows of goods and services (wealth) to permit productive inclusion. That is, apart from income redistribution, it will be necessary to generate the possibility that such income be related to the work of those who have not yet had access to reasonably decent standards of living, both at the global level and within China itself.

28Two drivers of growth have then slowed down, and the impact of this global deceleration of growth has added new problems to generate both annual flows of wealth at the global level and jobs in many countries. These factors also add to the growing productivity caused by technological advances (such as robotics and the automation of processes). Besides, as has been said, the service sector has also undergone deep changes as from the beginning of the digital and telecommunications era. The value added of some service sectors is exaggeratedly high in relation to the jobs they create, whether in the case of the cultural industries, or in different Internet service sectors, telephony, the financial sector, the sale of several goods and services.

29Thus, microeconomic optimization does not converge with its macroeconomic counterpart. Industries have become more capital intensive and less able to create jobs, and there is an inter-capitalist dispute for markets, which adds to a context of industrial competitiveness where large emerging economies take part, and where there is even dispute across them11. All this makes it difficult to foresee a long-term growth context with reasonable international labor division and absorption of excess labor potential. New solutions are then necessary at the global level.

30Such solutions are much more necessary in developing nations, since, in those contexts, standards of living might become worse, injustice and poverty might grow, and a series of governability problems might crop up. That is, the gap between the standards of living of developed and developing nations, as well as between the new global middle class and the rest of the social groups might deepen in the second decade of the twenty-first century with a gloomy outlook. Yet it seems there are no new theories or ideas to help prevent a situation that might render Piketty’s prophecy true, that of the relentless growth of the gap between the rich and the poor.

31Hence the title of this book: How to achieve the Welfare State in the Twenty-first century. Though it certainly does not mean to provide a comprehensive answer the question, it does mean to contribute new perspectives as from the analysis of simultaneous dimensions, the support of vast bibliography and important empirical evidence. And it also aims to contribute, as its main topic, the theoretical explanation of certain evolutionary mechanisms focusing on the connections between urbanization, growth, technological change and human capital. These are the main factors leading to a better understanding of two aspects: the changes that took place as from the second half of the twentieth century, and the nature of those changes and the challenges posed by the setting of an agenda aiming to implement sustainable development on a global scale with real integration of the dimensions implied by that concept.