High-Level Launch of “Oeconomicae et pecuniariae quaestiones – Considerations for an ethical discernment regarding some aspects of the present economic-financial system” 65th Session of the UNCTAD Trade and Development Board His Eminence Cardinal Peter K.A. Turkson Prefect of the Dicastery for Promoting Integral Human Development of the Holy See Palais des Nations, Geneva 6 June 2018
Ladies and Gentlemen,
I am very glad to be here at UNCTAD to launch the most recent publication of the Holy See, entitled Considerations for an ethical discernment regarding some aspects of the present economic-financial system (Oeconomicae et pecuniariae quaestiones)”. This document addresses a very important and topical issue - the shortcomings of the current international financial system - that has also been touched upon repeatedly during this 65th session of the Trade and Development Report. UNCTAD has an outstanding track record in addressing developing country debt crises and the need for international frameworks to facilitate sovereign debt crisis prevention and resolution, dating back to the 1970s and culminating more recently in the well-known UNCTAD Principles for Promoting Responsible Sovereign Lending and Borrowing as well as its Roadmap and Guide on Sovereign Debt Workouts. Its flagship report, the Trade and Development Report, has continuously provided timely and in-depth assessments of financial vulnerabilities faced by developing countries in the evolving global economy, as well as up-to-date policy analysis and reform proposals. This is therefore an ideal place and occasion to present to you our current concerns about the present economic-financial system as well as our thoughts and considerations about what is required to effect change in the interest of promoting integral human development, an interest that surely defines both our organizations.
The challenge: Hyperglobalization, financialization and the promotion of integral human developmentFor a long time, economic globalisation has been dominated by the belief that free markets would be an unstoppable force in producing greater riches for, and the fast and harmonious integration of, all peoples. This belief is now being shaken very seriously: As we can witness from the pages of almost every major media outlet these days, popular and populist opposition to economic globalisation, conducted under the hallmark of blanket beliefs in the self- 2 correcting forces of free markets and their ability to deliver not only new riches but also just and therefore sustainable outcomes, is on the rise. The global financial crisis of 2008 was a potential watershed moment. As the Pontifical Council for Justice and Peace - the predecessor to the Dicastery for Promoting Integral Human Development - rightly pointed out at the time, “[t]here is no doubt that today’s financial emergency came after a long period in which under the pressure of the immediate objective to pursue short-term financial results, the characteristic dimensions of finance were left aside. In fact, its “true” nature consists in favouring the use of the resources saved where they can promote the real economy, well-being, the development of the whole man and all men (Paul VI, Populorum Progressio, 14).”1 Yet, this chance for wider reflection and the promotion of reform was missed. A decade after the global financial crisis of 2008, financialization or “the growing influence of financial markets on the material well-being of most of humankind” (Oeconomicae et Percuniariae Quaestiones (OPQ, para 1), remains a core obstacle to progress, reform and the promotion of integral human development. An important corollary is the booming ‘business of debt’. Global debt stocks have risen from US$ 142 trillion in 2008 to US $ 230 trillion in the third quarter of 2017. According to UNCTAD, the ratio of global debt to GDP is almost 40 per cent higher now than in 2008. In essence, financialization continues to be a force that subjects ever wider areas of economic and social life to the private logic of financial risk management. What is more, ‘hyperglobalization 2 ’ has by now resulted in structural shifts in the relations between nation states and large corporations. These are not limited to financial markets, but as UNCTAD has rightly pointed out in its most recent Trade and Development Report (2017), have produced a new breed of corporate rentierism that has largely succeeded in leveraging growing market and lobbying powers to influence national and regional regulatory policy frameworks in a number of key areas for development3 to facilitate predatory corporate rent-extraction. In response, the slogans that draw most attention all have in common that they champion more exclusion and less solidarity. This assessment, that I believe we share with UNCTAD, provides the context of our reflections on how to affect progressive and inclusive change and on calling upon the international community to join us in stemming a growing tide towards destructive polarization, fragmentation and violence by reforming the present economic-financial system in favour of a heightened and conscious focus on the values of integral human development – that is the “development of every person, of every human community, and of all people” (OPQ, para 2).
Some fundamental considerations: The denial of ethical principles and technical reductionismThis Report acknowledges and reinforces the view according to which debates about economic and financial issues are not value-free. We therefore cannot perceive economic reasoning as independent from ethical reasoning: Every economic proposal has its ethical and normative frameworks, whether or not its advocates recognize this. The ethical and normative framework we propose is simple: We argue that, the integral development of every person, of every human community, and of all people, is the ultimate horizon of the common good that the Church [..] seeks to advance.” (OPQ, para 2). This implies that we “recognize the validity of economic strategies that aim above all to promote the global equality of life, that, before the indiscriminate expansion of profits leads the way toward integral well-being of the entire person and of every person. No profit is in fact legitimate when it falls short of the objective of the integral promotion of the human person, the universal destination of goods, and the preferential option for the poor.” (OPQ, para 10). The international community is therefore under a strong obligation to advance an international understanding by which shared ethical, cultural and normative guidelines inform the systematic reigning in of economic-financial practices. This “constitute instances of proximate immorality, that is, occasions that readily generate the kind of abuse and deception that can damage less advantaged counterparts” and “where selfishness and the abuse of power have an enormous potential to harm the community” (OPQ, para 14), owed largely to the dominance of the financial industry in the real global economy. Money and credit, per se, can be “good instruments” to be put at the disposal of the human person to expand their dignity, freedom and possibilities (OPQ para 15). They can also become the preserve of speculators, gamblers, rentiers and usurers that put private over public interests, and have the power to do so. In the end, and as the Considerations on an ethical discernment regarding some aspects of the present economic-financial system remark: “What was predicted a century ago has now come true today. Capital annuity can trap and supplant the income from work, which is often confined to the margins of the principal interests of the economic system. Consequently, work itself, together with its dignity, is increasingly at risk of losing its value as a “good” for the human person and becoming merely a means of exchange within asymmetrical social relations.” (OPQ, para 15). At the heart of the problematic nature of the current economic-financial system, as we see it, are its deeply entrenched inequalities and the primacy its grants to the speculative intentions of private investors. This does not deny or question the legitimacy or usefulness of the profit motive. “What is morally unacceptable is not simply to profit, but to avail oneself of an inequality for one’s own advantage, in order to create enormous profits that are damaging to others; or to exploit one’s dominant position in order to profit by unjustly disadvantaging others, or to make oneself rich through harming and disrupting the collective common good.” (OPQ, para 17). Furthermore, the speculative intention, when this becomes dominant, devours “the immense patrimony of values that renders our civil society a place of peaceful coexistence, encounter, solidarity, renewed reciprocity and of responsibility for the common good.” When this happens, “words such as ‘efficiency’, ‘competition’, ‘leadership’ and ‘merit’ tend to occupy the entire space of our civil culture and assume a meaning that ends up impoverishing the quality of exchanges, reducing them to mere numerical coefficients.” (OPQ, para 17).
The specific ills of the current economic-financial system and some remediesIn many regards, the current state of the global economy is reminiscent of the 1920s. This was a decade when leading nation states tried to get back ‘to business as usual’ after a huge shock. Austerity was the default macroeconomic policy stance. While international trade gradually recovered for a while, high unemployment was seen as an inevitable ‘bad’, whether temporarily or structurally. Growth was heavily reliant on attracting cross-border capital inflows and on debt. Financial speculation thrived, and inequalities increased spectacularly. Today’s political and economic tensions have much in common with this picture, with one essential difference: Economic globalisation has made enormous advances and its core feature has been the enormous expansion of the financial industry, at global levels, as well as, more generally, the rise of large multinational corporations to unprecedented influence and “hegemonies capable of unilaterally influencing not only the markets, but also political and regulatory systems.” (OPQ, para 21). In this context, abusive and amoral financial and management practices have proliferated. These, in our view, include the following:
• The logic of maximising shareholder value as the guiding principle of the management of companies: Where ethical considerations are perceived as irrelevant and juxtaposed to entrepreneurial action, and where business targets incorporation ethical considerations are penalized by “the markets”, managers are driven “to establish economic policies aimed not at increasing the economic health of the companies they serve, but at the mere profits of the shareholders, damaging therefore the legitimate interests of those who are bearing all of the work and service benefiting the same company, as well as the consumers and the various local communities (stakeholders).” (OPQ, para 22).
• Trading in ‘structured products’, credit derivates and securitarization, including credit default swaps or insurance contracts, in all but name: As the global financial crisis has demonstrated, these ‘financial innovations’ have hugely facilitated “the growth of a finance of chance, and of gambling on the failure of others, which is unacceptable from the ethical point of view” (OPQ, para 26). The shifting of financial risk to often unwitting economic agents, such as, for example, those forced into speculative pension schemes, has allowed the few to gain unprecedented riches at the expense of the many, through manipulation and speculation. • Proprietary trading: This entails “malicious negligence on the part of financial advisers regarding the protection of related interests to the portfolio of their clients.” (OPQ, para 22).
• The proliferation of offshore financial centres: While such centres offer some legitimate services, they contribute “to an additional impoverishment of the normal system of production and of the distribution of goods and services.” (OPQ, para 30). The formal reasons given to legitimize offshore financial centres is that they offer tax havens4 o It is particularly important that efforts, such as those in the UN of which UNCTAD is part, to measure and define types of illicit financial flows include such border line activities as tax avoidance, since while these may not always violate existing laws, they violate basic ethical principles and clearly damage the promotion of integral human development. As we know, from important work carried out here at UNCTAD and by the High-Level Panel on Illicit Financial Flows from Africa,
▪ About a third of total illicit financial flows represent criminal money related to drugs, racketeering and terrorism. Resources emanating from corruption explain only about three per cent of the total. In the meantime, cross-border tax related transactions account for the remaining two thirds of the total, about half of which corresponds to transfer pricing by multinational corporations.
▪ Furthermore, and according to the 2014 Report of the High-level Panel on Illicit Financial Flows from Africa, such illicit financial flows can be as high as $50 billion per year.5
• The trading of sovereign debt titles and securities to provoke “artificial reductions of the prices of public debt securities, without regard to the negative impact or the worsening of the economic situation of entire nations” (OPQ, para 17). We summarily object to the subjection of sovereign debt titles to immoral financial practices. We particularly welcome, in this respect, UNCTAD’s long-standing work on providing solid foundations for soft-law and other regulatory principles and tools to facilitate sovereign debt crisis prevention and resolution. In response to this deeply rooted malaise of the current economic-financial system, we propose the following counter-measures:
• First of all, we maintain that “experience and evidence over the last decades has demonstrated […] how naive is the belief in a presumed self-sufficiency of the markets.” (OPQ, para 21). Regulation is therefore required that guarantees “serious control of the quality and reliability of every economic-financial product, especially of those more structured” (OPQ, para 13 and 21), such as securitized financial instruments. Such regulation is required to reign in the speculative intention and to counter “the growing and all-pervasive control of powerful parties and vast economic-financial networks” to empower those “deputed to exercise political power” and who now “are often disoriented and rendered powerless by supranational agents and by the volatility of the capital they manage”. (OPQ, para 12).
• Specifically, “public authorities should provide a certification for every product generated by financial innovation in order to preserve the health of the system and prevent negative collateral effects.” (OPQ, para 19). This will require “supranational coordination among diverse structures of local financial systems” (OPQ, 20 and 21) and should aim at promoting and nourishing “economic and financial biodiversity” (OPQ, 20), strengthen the principle of cooperation (OPQ, para 20) and encourage cooperative and public credit, “in the service of families, businesses, the local economies, as well as credit to assist developing countries.” (OPQ, para 16).
• We also propose an important role for “self-control of the legitimacy of major steps in the decision-making process and of the major products offered by the company” through the institution of Ethical Committees, operating alongside administrative and management councils and company boards.
• Beyond important tools for self-control by companies, we propose in particular the desirability of the introduction of a “general clause that declares illegitimate, with consequent accountability of the assets, all the person to whom these are attributable, and whose predominant aim may be to bypass the existing norms” (OPQ, para 28).
• While we believe that individual States are called upon “to protect themselves with appropriate management of the public system through wise structural reforms, sensible allocation of expenses and prudent investment”, for example to avoid unsustainable debt burdens and “economic losses created by private persons and unloaded on the shoulders of the public system” and promote effective domestic taxation systems, we strongly encourage international initiatives and efforts to facilitate just and effective sovereign debt restructurings, efficient international tax cooperation and to deliver “reasonable and concurred reductions of public debt” (OPQ, 32). In particular developing States often cannot achieve financial sustainability and meet vast investment requirements on their own. Co-ordinated support and solidarity from the international community is indispensable, not only for individual developing States but also in taking responsibility for just reforms of the international economic-financial system.
Closing remarksI thank you for your attention to our reflections on urgently needed fundamental reforms to the current international economic-financial system. It is in our view indispensable that we find our way back to a global financial system that is again build on firm ethical principles, and their daily application, of justice, truth, fairness and solidarity. Given the massiveness and pervasiveness of today’s economic-financial systems, great responsibility lies on the shoulders of those in charge of these systems. But civil society, policy-makers in developing countries and elsewhere, as well as community leaders, intellectuals and all those affected by the activities of powerful economic-financial agents can work together to bring about such reforms as here argued and outlined. I am sure that the Holy See, the Dicastery for Promoting Integral Human Development and UNCTAD share a deep commitment to these values and objectives, and I look forward to fruitful and close future cooperation in this regard.
1 Pontifical Council for Justice and Peace (2009). A New International Financial Pact. Note on Financing and Development in view of the Conference promoted by the United Nations General Assembly in Doha. November 18, 2008. Vatican City., p. 9
2 The combined and continuous deregulation of financial, labour and goods markets around the world
3 such as intellectual property rights, investment policies, taxation issues as well as development financing
4 Tax Heavens “have become an opportunity for financial operations often border line, if not beyond the pale, both from the point of view of their lawfulness under the normative profile and from that of ethics, meaning an economic culture, healthy and free from the intentions of tax avoidance.” (OPQ, para 30,).
5 It is estimated that Africa lost about $854 billion to illicit financial flows between 1970 and 2008, or an average $22 billion annually. This is almost equivalent to all official development assistance the continent received in this period (OECD, 2015).