ABSTRACT
The industrialized countries are undergoing a phase of economic stagnation, mainly due to the market saturation resulting from the decline of consumer demand.
The first priority to be achieved is, therefore, to revive growth and development, by enlarging the market and creating sustainable development in non-industrialized countries, where demand is far from saturation.
The sustainable character of development requires new technologies, in order to be ecologically respectable and to avoid replicating wasteful models.
The technological development work has therefore to be directed to the improvement of the existing processes and to the attainment of a new model, based on three basic objectives: reduction of the use of raw materials and energy per unit of product; reduction of the cost of putting in order the old sites of production; and reduction of the emissions of poisonous gases and effluents.
These fundamental objectives can be better achieved if the industrialized countries move out of the present stagnation and resume reasonable rates of economic growth, though these will inevitably vary from area to area.
36I must first of all confess that I have some difficulty in dealing with the subject of the workshop.
How can we talk of sustainable development when there is no development at all? In the industrialized world, global demand has been growing very slowly, if at all, for some time, and the fear is spreading that this may have structural rather than temporary roots. Personally, I believe this fear to be well justified.
The economies of Western Europe, the US and Japan are indeed in a phase of stagnation. We are not in a recession, we are stagnating. The crystal ball gazers talk about an average GDP increase of 1–2 per cent in any of the next five years, and those who suggest a growth of 3 per cent in the US are considered quite optimistic. In a recession, GDP does not increase much even in ‘good’ years because demand is sluggish or declining outright.
The reasons are not easy to explain, partly because stagnation as an economic phenomenon went off the economists’ syllabuses ages ago.
Perhaps the reason is that in the industrialized countries some important factors are putting the brake on demand for consumer goods. The first of them is saturation. A three-car, two-house, five-television-set and countless-gadget family may not particularly want to increase the heap of consumer goods it is supposed to use. Acquiring a new car would actually create the problem of where to put it, and when to use it: the family would end up considering it a nuisance rather than a facility.
The second factor is population. In industrialized countries demand is not increasing strongly, partly because population is growing very little, if at all. This is also a ‘saturation’ effect. The cost of raising children in these countries is now so high that many people decide to have them later, if at all; this strongly restrains the increase in demand. These two factors may be at the origin of the exhaustion of the long cycle.
Moreover, due to stagnation some categories of workers – especially blue collar workers – may not have the money to increase their expenditure, or even to keep it at the same level as before.
Technological progress has a sinister edge, too. The better the machine tools, the fewer the workers, the lower the total wages paid. The built-in tendency to restrict employment in manufacturing, and therefore demand, has until now been counter-balanced by an increase of employment in services, in which, 37alas, productivity increases very slowly, if at all. Some people even say that it is downright improper to talk of the productivity of services. Production jobs lost have been offset to some extent by the increase in these white collar service jobs. Industry has become like the American army, with six back-up men for each soldier in the firing line.
However, this cannot go on. Companies which have not adopted the latest labour-saving techniques and equipment have high production costs, making them uncompetitive and preventing them from keeping on the payroll the number of non-productive people they already employ, let alone increasing it. So, the total wages bill may not increase quickly enough.
Moreover, governments are too deep in debt to apply the Keynesian recipe, which may not work even if applied, given the fact that the modern economy is much more rigid than the one Keynes was talking about.
We are experiencing the vicious circle of stagnation: as demand does not grow, we are left with a crisis in the capital goods industry, a very slow increase in productivity and a slowdown of GDP growth. This is the sum total of the factors we have been quoting up to now, the combined effect of the production cycle of capital goods and of the decline of the main items of consumer demand. We could conclude by saying that the great era of the motor car and the sprawling city which supported demand for practically everything is over. The result is that industry, and especially those industries which have been the beneficiaries of such an era, is suffering deeply. It seems that there is no way to solve this problem without tackling the macro issues.
What should we do? Well beyond the scope of any single industrial company, and even of any single industrialized country, at the macro level the only thing to do is to enlarge the market by creating development in non-industrialized countries. This can be done by exporting capital, that is, investing abroad, a measure which has been taken many times in history for exactly the same purpose. Some historians even attributed the survival of capitalism as an economic system to the creation of the great North American market as a result of European, mainly English, investments in the seventeenth and eighteenth centuries.
Just imagine what the OECD countries could do by simply redirecting the $350 billion per year they waste in supporting their own agriculture! Suppose they had invested some of this money in agriculture in Third World countries. How many tonnes of plastics or steel would we now be selling, directly or incorporated in various goods, to, say, Mali, or Vietnam?
38This misdirection of investment, I am afraid, is the fundamental problem of the world economy.
We have to resume development. I am well aware that this is a non-economic choice, but a value judgment. A value judgment, let me say, which looks very much like one made by Monsieur de la Palisse. In poor countries, economic development is better than poverty, which means physical pain due to hunger, bad accommodation and sickness, and an early death after a miserable, short life. It is, however, clear to me that development in these countries is not going to accelerate unless there is growth in the developed countries.
Of course, we have just said that the countries that are rich, or over-rich, are stagnating because of market saturation. So we have to create growth of demand somewhere else, supplementing the spontaneous trend of the world economy, which is ensuring that some countries in Asia, which are not poor now, but certainly were poor a few years ago, are experiencing the only real growth left in the world economy.
Capital exports from stagnating countries would almost certainly do the trick, if used to finance investment projects, especially industrial ones, rather than to subsidize consumption. This is a sure way to revive capital goods demand, and consumer demand may very well follow.
Suppose, to make things simpler, we single out an area for investment which does not compete with anything in Europe, but would actually improve the supply opportunities of the old continent: for example, natural gas.
We all know that Europe will need more gas in the next two decades. Its present supply structure looks like a wheel with one spoke missing: the north/ south is there, the north-east/south is also there, and so is the south/north -I mean, gas coming to Europe from the North Sea, Russia, and Algeria. What is missing is the south-east/north-west link: gas from the Middle East coming into Europe. And one of the routes could be through North Africa, for example, via a big feeder running along the coast.
In North Africa we have a rather convenient mix of raw materials and investment opportunities, plus the awareness that Europe has to take care of its borders. The southern border spanning the Mediterranean is one of the most sensitive; it has been this throughout history.
39North Africa has plenty of gas, and we should take care that it gets transformed into economic development, as was the case, for example, in northern Italy in the 1950s and 1960s.
Gas can be brought to the North African domestic market either as gas or as electricity, as technological changes have made gas-generated electricity cheaper, cleaner and faster to produce than conventional oil- or coal-generated electricity. A gas feeder along the North African coast would integrate local and Middle Eastern gas, and be a big transport as well as a distribution facility.
Natural gas liquids are among the best raw materials for petrochemicals. So we may have the makings of a three-way development programme in North Africa, which would hold out hopes of a fresh bout of economic development there; new gas sources for Europe; and less intractable political problems on our southern border.
I believe that this is a good example of the investment opportunities that can be created in a specific part of the world, which could, at least, increase the demand for capital goods.
I don’t mean that investment and electricity in North Africa is going to be enough to steer the world from stagnation to growth. However, the methodology of large projects in areas which need them should be developed further, in order to produce a set of concrete proposals for reaching the goal of international economic growth.
The present is actually a good time for such an enterprise, because stagnation is touching the financial world too, and there is a lot of money floating around that has not been put to good use. We may even find ways and means of financing such plans, partly from private sources, provided the projects are bankable, that is, provided they can be considered eligible for project financing.
What is needed to carry out project financing outside the traditional area in which this technique was born – the development of an oil field – is a set of guarantees from the various partners in the investment. These include a completion guarantee from the technical partners and the chosen engineering company; a raw material delivery agreement, at prices known to and approved by the lending banks; a full lifting agreement from a credible international marketer, covering the full production of the investment; an escrow account through which sales proceeds will flow, and from which the lending banks can extract their dues; a cash deficiency agreement, involving both raw material and finished product prices, in case the market deteriorates markedly; and, finally, a commitment from the host country not to interfere with the work. Clearly, these conditions require the presence of a major company – one that is accepted by the financial institutions, has a consolidated market or can find one, knows how to negotiate with banks and governments, how to put up a feasibility study and, above all, how to distinguish a profitable from a non-profitable project.
40We have now to take into account the second item of the equation. We don’t simply want development, we want sustainable development.
I take this to mean that development or growth must be ecologically respectable, that is, entail less squandering than in the past of often irreplaceable assets through wasteful production technologies and inept planning.
This is equivalent to saying that we need technologies, not only for growth, but also to make growth more user-friendly. We most emphatically do not want to replicate in other areas an economic development as wasteful as, for example, that of the United States, which took place in a resource-rich country, at a time when ‘sustainability’ was not properly understood.
I am not talking here of breakthroughs, of new discoveries that would change all our ways of producing and utilizing goods and services. I am discussing something much humbler, the improvement of existing processes and products, the application of new ideas – wherever they come from – to our production system to make it, step by step, look more like the model we all have in mind. In normal times these innovations come in normal times in a steady flow, but this is somewhat limited and thinned out by the stagnation. We need better technologies, and somebody has to provide them.
Where do new technologies and innovations come from? They have basically three origins:
The research laboratories of large corporations, that is, the commercial corporations working for profit, and non-commercial corporations, like large universities and foundations, which live by spending those same profits.
41The companies already producing goods, which as a matter of course continually aim to improve their products. This applies particularly to the companies producing capital goods, which continuously improve their machines to compete on the market.
The individual innovator, who may be a former peasant or a humble mechanic, who creates a new product, a new service or a new, resource-saving way to produce existing products or services.
How do we stimulate the improvement of technologies or the appearance of new ones?
The first obvious engine of innovation is economic development itself. A market in full development will produce new protagonists like the above-mentioned humble mechanic; established production companies will be impelled to invest by rising demand. Usually the larger the number of a certain capital good produced, the better its quality. The more a certain process is embodied in industrial plants, the better it becomes, by adding up all the improvements brought in at every edition, as it were.
Development also produces more money for research. It is well known that over time large research establishments tend to increase their expenses and to reduce the rate of applicable discovery per dollar spent, so that the increase in expenditure has to be large to get any results.
The second engine of innovation may be concentration of effort. It may be impossible to direct the animal spirits of the newcomer who succeeds because he is an innovator: he will do whatever he is capable of doing, and trying to direct him would only result in putting a brake on his inventiveness. However, we can direct the efforts of the large corporations, both those involved in production and those in education, which may be persuaded to share in some kind of objective, to further their attainment.
What are the objectives?
We have to redirect the flow of technological innovation towards three basic objectives, all related to the need to reduce the cost of attainment of a better ecological balance between the production of goods and services and its effects on the environment. These objectives are:
42To reduce the use of raw materials and energy per unit of the product or service supplied throughout the economy;
To reduce the cost of putting in order the old production sites, on which centuries of industry have piled up refuse and poisons, which look extremely costly to clean up; and
To reduce the emissions of poisonous gases and effluents from vehicles and industrial plant to reduce air pollution in the cities.
The first and the third objectives are closely related; the second is much more important than one might think, especially in developed areas where the industrial sites date back to the previous century.
The objectives I have mentioned are not new, in the sense that some work has already been done, at least on the first and the third, by creating new products, such as the additives for unleaded gasoline, which constitute a very good example of what I meant when I spoke of new technologies. The main additive, methyl-tertiary-butyl-ether (MTBE), has by now a world market of approximately 11 million tonnes per year, which will practically double by the end of the century. When one considers that the first world-scale plant came on stream in 1989, this development is impressive indeed. Interestingly enough, MTBE is produced by world-scale plants which embody what is actually an old technology, dehydrogenation, which had almost gone out of use, but was first revived and then improved, and is now available in two or three completely new versions.
Even more important than the volume of change has been the resistance to change. The US has followed the road of technological improvement of the engines and fuel it utilizes, to the point of indicating in detail which gasoline has to be used in which state. Europe still uses an enormous amount of leaded gasoline, and the European oil companies are desperately opposing the very concept of reformulated gasoline.
We have the technology, the new engines, the new products, which have entered the market with remarkable speed; we need to apply them – as any of us taking a stroll in a European city might be willing to say – but we are set on the slowest possible course for doing so. Instead, we have concentrated our efforts on the limitation of carbon dioxide, and on the greenhouse effect, 43for which we have no technology, and on which the scientific evidence is in fact beset by doubts and uncertainties. Do I detect some kind of what the Italians call ‘una fuga in avanti’, that is, a wilful attempt to conceal the resistance to solving one problem by pointing out other, perhaps less solvable, ones?
