From Winter 2002 issue of Chaordic Commons ©2002
by Jeff Gates
The Chaordic Commons is built upon the concept of a shared space that is owned by no one yet every user benefits from its use. This concept is found in every area of human organization, including finance and economics. Threats to the global commons always appear daunting, particularly such systemic threats as persistent abject poverty and environmental degradation. Happily, the commons are a potential source of the financial resources required to address both threats. Thats because global capital markets operate as a conventional commons, akin to a shared pasture in which everyone grazes their livestock. No one owns the pasture, yet every user benefits from its use. Throughout history, commons have served as a key source of financial value. Financial markets themselves offer a dramatic modern-day example.
For instance, financial securities can rightly be called "securities" only because the force of international law, another crucial commons, underwrites cross-border property rights in those securities. That legal claim traces its financial value to an organizational commons founded on private property principles and on its corollary, the cross-border enforceability of contractual claims, including those embodied in securities traded in capital markets.
In addition to underwriting the value of those property rights, capital markets add an additional element of financial value by offering security-holders an opportunity to diversify their holdings, thereby lowering investment risk and enhancing value. Security-holders can also exchange their contractual claims (AKA securities) for cash, a value-added benefit. In financial terms, that potential "liquidity" boosts the value of a traded security by 35 percent when measured against an untraded security in a comparable firm. That financial premium stems from the opportunity this commons offers for diversification or cash. In that sense, the "capital commons" operates as a "financial field" in which financial value emerges due to the financial possibilities in that field.
Its long been clear whose cattle get the fattest in the capital commons. In the four years to 1999, the 200 most well-to-do people worldwide saw their wealth double to a combined $1 trillion. Two decades ago, the U.S. was populated by 13 billionaires. By 2000, there were 274. Between 1982 and 1999, the 30 largest fortunes in the U.S. grew more than ten times larger while, from 1998&emdash;2000, the wealth of Americas 400 richest people grew an average $1.9 million per day or $240,000 per hour, 46,602 times the minimum wage. Over the past thirty years, Fortune magazine reports that the average compensation of the top-paid 100 executives of U.S. firms skyrocketed from $1.3 million to $37.5 million, or from 39 times the average employees pay to 1,000 times. Much of that compensation was realized as stock options that rely for their value on the liquidity provided by capital markets.
We know where todays megawealth-holders reside, but where &emdash; precisely where -- does their financial wealth reside? And what contribution does the capital commons make to the creation and maintenance of that wealth? Some portion of that value is traceable to the legal environment that accompanies the institutional infrastructure essential to the operation of free enterprise economies. That commons-provided value, while clearly significant, is just as clearly difficult to quantify. Thats not the case for liquidity, a "property" (feature) of financial property with a quantifiable value that emerges as a financial premium in a commons-provided "field" of financial possibilities.
Happily, the worldwide reach of this value-generating commons offers more than just an opportunity to make the rich far richer, even though the prevailing neoliberal economic model thus far ensures that destabilizing result. The value created by this contractual commons also offers a possibility to address persistent abject poverty with a nominal 3.5 percent Capital Commons User Fee. If levied on the average $5 billion of financial wealth held by the worlds 200 richest people, that single user fee could generate $35 billion per year, the amount that UN development experts say is needed to fund the minimal conditions required for the flowering of human potential worldwide: safe drinking water, sanitation, adequate nutrition, primary education, basic health care, and family planning for all willing couples.
Three-quarters of those 200 multi-billionaires live in the worlds thirty richest countries; sixty reside in the U.S. By comparison, $35 billion is nine percent of the FY 2003 budget for the U.S. Department of Defense, or roughly what the U.S. spent in 1999 to maintain the military readiness of its nuclear arsenal, a decade after the fall of the Berlin Wall. For the developed world to raise $35 billion would require foreign aid totaling 0.7 percent of those countries combined GDP, as compared to an average 0.22 percent presently contributed by donor countries (only 0.13 percent by the U.S.).
What development requires is a financial strategy capable of addressing the current development models most obvious shortcomings &emdash; todays fast-widening economic divide and todays fast-widening environmental degradation. All the better if that strategy also underwrites the political stability required for financial stability in a world where injustice, indignity and a fast-deepening desperation are destined to evoke continued anger, resentment and terrorism. Whats suggested here is a development-finance strategy that turns to two user fees designed to recoup for the commons a portion of the financial value added by the commons.
Let the User Pay
A "liquidity-services fee" could be collected as a Capital Commons User Fee from just 200 of the worlds financially "fattest." At 3.5 percent, less than a typical value-added tax, that fee could recoup for the commons just 10 percent of the 35 percent in financial value thats due solely to a feature the commons now provides free-of-charge. By contrast, the well-known "Tobin tax" on currency traders, proposed more than three decades ago, is aimed at transactions in financial markets when, in truth, its the opportunity for a transaction thats the source of value. The difference is akin to that between kinetic and potential energy. A tradable security has more value than one not tradable, regardless of whether it is actually traded, as any banker or broker can tell you, pointing to the well-known fact that a traded security has enhanced value as collateral.
The eradication of persistent abject poverty could be accelerated if development-financed were funded with a "prosperity bond" backed by the proceeds from two user fees: that 3.5 percent Capital Commons User Fee combined with a 3.5 percent "Freeloader Fee" on tax-haven accounts. Both fees presume the international cooperation required to generate financial transparency in the worlds thirty-seven tax haven jurisdictions (the Cayman Islands, the Isle of Mann, etc.). The requisite transparency can be catalyzed by self-organizing non-governmental organizations offering a combination of whistleblower rewards and negotiated political asylum for those in tax havens (bookkeepers, secretaries, accountants, etc.) who are willing to divulge the data needed to identify tax haven account-holders.
If those "prosperity bonds" were made a mandatory investment for tax-favored retirement plans in developed countries, development could be dramatically accelerated, its funding provided by the emergent "properties" (features) of todays emerging markets development model &emdash; i.e., todays officially encouraged capital market liquidity and todays officially sanctioned non-transparency in tax haven countries.
At the March 2002 Finance for Development summit in Monterrey, Mexico, heads of state and development bankers assumed that the funds needed to address poverty could come only from the fiscal resources of the developed world. Instead, better use could be made of existing fiscal resources. In the U.S., for instance, the annual fiscal expense of tax incentives for retirement plans &emdash; 401(k) plans, pension plans and the like -- exceeds $110 billion per year. That makes retirement security second only to national security as a financial commitment.
Serendipitously, the financial obligations of pension fund managers are perpetually twenty to thirty years in the future &emdash; when pensioners retire. Thats why these managers, have a risk-management responsibility to invest in long-term systemic stability, a goal shared by the international financial institutions (World Bank, IMF, etc.). Globally coordinated rulemaking in the thirty OECD countries could ensure that these massively subsidized retirement plans invest in "prosperity bonds" as a condition of their continued tax preferences.
With multilateral enforcement of these two user fees, the revenues required to pay interest on prosperity bonds are more than sufficient to make this a self-financing mechanism for funding development. For example, the IMF found a half dozen years ago that at least $4.7 trillion is held in tax-haven countries. More recent estimates put the figure closer to $14 trillion. Assuming the total is now roughly $10 trillion, a 3.5 percent Freeloader Fee, if fully successful, could yield $350 billion per year, plus another $35 billion from the Capital Commons User Fee. Roughly equivalent to the U.S. defense budget, $385 billion per year in user-fee revenues is sufficient to mount a credible Commons Defense by addressing the needs of the poorest while also raising the $300 billion that environmental researchers at Cambridge and Sheffield Universities estimate is required to "save the planet."
Justice Delayed Is Justice Denied
The "Monterrey Consensus" provides a stark reminder that current development-finance strategies remain inadequate when compared to urgent human and environmental needs. At present rates of investment, the UN estimates that even universal access to safe drinking water cannot reasonably be expected before 2025 in Asia, 2040 in Latin America, and 2050 in Africa. The United Nations Development Program reports that 1.1 billion people lack safe water. Adequate sanitation is lacking for 2.3 billion. An estimated 36,400 people die each day from conditions related to malnutrition; most are children under five. One in seven children of primary school age is out of school. Universal access to primary health care for children remains a distant dream, even in the United States.
Yet because of a lack of fiscal resources in developed countries, development experts propose that the human family wait another half-century to address critical human needs that were first identified a half-century ago. Nothing could be more certain to breed the instability that is itself a key barrier to development. Monterreys palpable lack of urgency, chillingly repeated in August 2002 at the Johannesburg summit on sustainable development, offers keen motivation to evoke a self-organizing funding source for development and environmental restoration. This dual user-fee strategy meets that standard, assuming the requisite financial transparency can be generated and multilateral enforcement follows.
Absent a practical and palatable development-finance strategy, todays destabilizing trends will continue to worsen. Worldwide, the richest 20 percent account for 86 percent of global consumption while the poorest 20 percent get by on 1.4 percent. Since 1985, economic decline or stagnation has affected 100 countries, reducing the incomes of 1.6 billion people. By the mid-90s, the income of the most well-to-do one percent (50 million people) equaled the combined income of the poorest 57 percent (2.7 billion people). In 1960, the income gap between the fifth of the worlds people in the richest countries and the fifth in the poorest was 30 to 1. By 1998, that gap had widened to 74 to 1.
While the long-term solution requires dramatic reforms in the dominant neoliberal development model, short-term stability requires the assistance of civil society to evoke a development-finance strategy able to address critical human and environmental needs that, left unmet, will continue to undermine the viability of free enterprise democracies worldwide.