The Words of the Betancourt Family

The Democratization of Access to Money and Credit

Antonio L. Betancourt and Mark P. Barry
November 2003

Antonio L. Betancourt - President
Dr. Mark P. Barry - Senior Research Fellow
The World Institute For Development And Peace
3600 New York Ave. N.E., Suite 360
Washington, DC 20002-1947

Despite pronouncements that democracy and capitalism have triumphed over communism and socialism, we see that peace and justice have by no means prevailed in the post-cold war world. War, poverty, and many forms of social injustice remain deeply rooted throughout the globe. While the benefits of globalization are trumpeted by the most industrially advanced countries, a seemingly endless series of economic and financial crises have arisen in the past decade -- starting with Mexico in 1994-95, moving on to East Asia in 1997, Russia in 1998, Brazil in 1999, and Argentina in 2001 -- and more are likely to come. Developing countries, in particular, seek another path toward development and prosperity, fully realizing that neither the capitalist road nor the socialist paths are viable or just.

Today, there exist huge disparities in the ownership of productive capital that inexorably lead to imbalances in the international system. Simply put, ownership of what can be broadly defined as property especially corporate equity which tends to be concentrated in the hands of a minority of owners, depriving the majority of non-owners of the ability to own property and corporate assets themselves and limiting their income opportunities to wages provided by owners. Despite the differences between (Wall Street-style) capitalism and socialism in the role of the state, both economic models are inherently oligopolistic or monopolistic in the ownership of the means of production, and lead, however unintentionally, to the concentration of capital and credit in the hands of a few.

Throughout the world, the widening gap between rich and poor -- even within the most industrialized economies -- has become an ever more serious problem, and a potential source of regional and global conflict in the coming years of the 21st century. The modern capitalist alternative of income redistribution -- a feature of the so-called welfare state -- does not expand ownership, and thus cannot cure, only alleviate, poverty. In the more prosperous countries, income redistribution is supplemented by a vast expansion of credit for the purchase of perishable goods and housing, vastly increasing consumer over indebtedness, but not ownership, thus not treating the problem at its source.

In the international arena, financial crises -- which are always accompanied by a collapse of commercial credit -- have been traditionally treated through the extension of loans by governments and international financial institutions, especially the IMF, as the means for the affected country to immediately repay its lenders. The strict conditionality applied to loans to insolvent countries, if strictly adhered to, make the underlying conditions worse and economic recovery more difficult. In the end, it is the consumer in the affected country who foots the bill for the IMF bailout, not the donor nations or agency. Such financial crises are a nightmare for affected countries to bear, for the prescribed solutions are worse than the disease.

The World Institute for Development and Peace believes it is possible to democratize access to money and credit, thereby empowering the majority -- 80-90% of the average country's population -- with the ability to become owners of property and productive capital. By broadening the base of ownership, national economies can reverse the unjust, undemocratic and dangerous tendency for ownership to concentrate in the hands of a few, and for countries to avoid the ever-downward spiral of insolvency often due to circumstances beyond their borders. And the changes required in national legal and economic systems are comparatively minor to make it possible.

In all corporate finance, projects must be self-liquidating -- new investments, whether improved land, new buildings or new tools, must pay for themselves. Generally, three to five years is the normal period given for payback. For example, despite the over $2 trillion of new productive assets added to the U.S. economy every year, virtually none of this newly created capital is financed in ways that create new owners. Yet, as suggested by lawyer/economist Louis Kelso and others since the 1950s, most of these assets could be financed in ways that they could be more broadly and privately owned.

For an individual who is not wealthy -- who in particular has no collateral, such as property -- obtaining a commercial loan may be close to impossible. The simple reason: banks are afraid the loan cannot be repaid, and the would-be loan recipient has no assets that could be presented to pay for a defaulted loan. The vicious cycle that ensues is that those who are already owners can get more loans because of their expanding property ownership, while those without collateral have enormous difficulty in obtaining credit from a bank. This is the common pattern in the concentration of wealth.

The WIDP maintains that self-liquidating capital credit can be made accessible to employees of businesses and other non-owners of productive capital, turning them into independent capital owners. On a national scale, democratization of access to credit and ownership need to be supported by a comprehensive expanded ownership strategy throughout a national economy.

We advocate the application of "pure credit," both on the micro and macro levels, which is a means of easing disparities in wealth. In its simplest explanation, it is giving credit to individuals or small businesses that do not have any or sufficient collateral but that can prove to commercial lenders that their project or venture can be self-liquidating. Rather than seek collateral from the would-be loan recipients, commercial lenders would have their loans backed by insurance or reinsurance, funds set up specifically to protect the lenders from risk. Meanwhile, loans to current non-owners would be repaid to the lending institutions through the future earnings of the loan recipient's business project, as long as it was deemed to have a sound business plan. No prior savings or collateral would be required in this use of pure credit.

Major infrastructure projects can also be accomplished through this methodology. An airport, for example, can be built through a combination of economic technologies ESOPs, CICs, etc. (see below) which, working in tandem, can accomplish the project.

From a macro perspective, a country's central bank would print paper (currency), and then sell it to commercial banks at 1-1.5% interest (or even less) to recover the cost of printing. In turn, commercial banks, would lend at an interest rate of 1-1.5% to cover the costs of loan administration and insurance/reinsurance.

Central banks would limit the extension of pure credit to current non-owners, allowing the existing pool of savings (or wealth) to be used for non-productive government and consumer borrowing. The application of pure credit would expand a nation's money supply in a non-inflationary way, freeing the economy to grow to the full limits of its workforce, resources, and technology. New capital creation would become a source of an expanded income for the poor and middle-class who do not have an adequate and secure income; they would produce and earn more as owners of "procreative" capital.

There are a number of expanded capital ownership structures that can be effective tools to bring about the democratization of access to credit and ownership. These include the Employee Stock Ownership Plan (ESOP), which has a proven track record in the United States (1,500 U.S. corporations are 100% employee-owned), the Consumer Stock Ownership Plan (CSOP -- e.g., stock ownership plans for utility users and regular customers of enterprises), and the Community Investment Corporation (CIC -- e.g., resident share ownership of local land development corporations and community infrastructure). Such structures would need to be set in place as a pillar of economic policy, where political focus would shift to needed monetary, banking, insurance, tax and other legal reforms necessary to create a system where capital ownership is accessible to every citizen (i.e., legal and institutional barriers to more equal ownership opportunities would need to progressively be dismantled). Ownership would be decentralized not by depriving existing owners of their wealth, but by increasing overall wealth and enabling non-owners to become new owners.

The implications of expanded ownership and credit are profound. For countries with a highly educated work force -- such as South Korea or Colombia -- many people lack legitimate means of engaging in full economic participation, especially in the ownership of income-producing capital. In Colombia's case, much of the educated labor force is compelled to join the criminal economy. Yet legitimate and attractive opportunities can be created through ownership-expanding methods. These state-of-the-art technologies can assist the creation of new companies and help existing firms who are currently state-owned but must become privatized and profitable.

While the investment communities in New York, London, Tokyo, as well as international financial institutions like the World Bank, have available funds to finance significant private sector development, at best they can only create jobs. Many countries are unable to absorb a major inflow of capital because their business environment is not conducive to secure a return on the investment; the private sector fears losing its collateral and thus cannot utilize these funds. Some countries even were recipients of several hundreds of millions of dollars from international financial institutions, but their private sectors could only absorb 10% of the funds, with the result that the balance of funds had to be returned. However, through democratizing access to money and credit, this can be overcome.

Moreover, rather than restructure an existing economy, it is possible to establish a parallel legal system to foster system-wide experimentation (e.g., ESOPs) based on economic democratization. This would not disturb the existing economy in a country, nor cause resistance from those who might perceive restructuring as meddling or interference.

WIPD envisions a future where, facilitated by capital credit and loan default insurance, each citizen can begin to accumulate dividend-yielding shares in

1. the company he or she works for through an ESOP;
2. the companies he or she regularly buys from through consumer stock ownership plans (CSOP); and,
3. a community investment corporation (CIC) to link him or her to the profits from local land planning and development including structural developments such as highways, railways, bridges, utility companies, harbors, tunnels, etc.

The World Bank, IMF, and other international financial institutions find themselves in a major dilemma. They want to promote ownership expansion and private sector development, yet the international financial system, especially with regard to development assistance, is geared towards maintaining the status quo channeling funds that tend to increase the concentration of ownership in a country. Another example is what happened recently in Bolivia: Bolivia had the opportunity to export natural gas to Mexico and the United States, yet the reaction of the Bolivian public was that only the elites in the country would benefit from this transaction, not the masses. As a result the Bolivian president was forced to resign amidst protests and violence that killed 80 people, fearing that South America's poorest country would be deprived of its natural resources. However, this could be corrected through the implementation of ESOPs and CICs real mass economic empowerment for the common citizens of Bolivia owning the natural gas enterprises and infrastructure.

The disenfranchised mass public tends to revile these international financial institutions. They are seen as benefiting the status quo, not the people in need, and protecting themselves and their counterparts in poor countries. Apathy and resentment towards the World Bank, IMF and other international financial institutions has reached such a crescendo that they can no longer safely hold annual meetings in major capitals, but must find harder to reach locales that protect them from the possibility of public violence. This reflects a negative perception and even hopelessness from the masses that there is little possibility of them having meaningful participation in shaping their future. The masses feel an enormous burden on their shoulders to be responsible for the financial moves of their governments which in the past only benefited a few and did not improve the conditions of the majority.

Given this reality, we believe these international financial institutions would be keenly interested in new structures to receive funding that would broaden mass ownership rather than further enrich oligopolies. The world needs a plan that will transform the masses in the next 10-20 years.

The World Institute for Development and Peace is willing to collaborate with the civil society in interested nations in providing advice, facilitation, and to work together to address the problems of the lack of participation of the masses in wealth production and ownership. There are other institutions that we are sure are willing to help, such as the Center for Economic and Social Justice (CESJ), and the Kelso Institute.

The benefits of expanded access to credit and ownership will have a profound and positive long-term impact upon the national and regional economy and of course on the world economy. It will create only winners, not winners and losers. It is the only path for a globalization with justice for the common citizen. We know of no better tool today with the potential to cure the pervasive problem of poverty.

Recommended Reading

Bailey, Norman A., "Central Bank Funding of Economic Growth and Economic Justice through Expanded Capital Ownership," Washington, DC: October 2002 [available at] Betancourt, Antonio, "For the Colombia of the 21st Century: A Proposal of Economic Justice to Make Each Individual an Owner," Bogota, Colombia, March 2001 [available at ]

Kelso, Louis O., and Adler, Mortimer J., The Capitalist Manifesto, New York: Random House, 1958 [available at ]

Kurland, Norman G., "A New Look at Prices and Money: The Kelsonian Binary Model for Achieving Rapid Growth Without Inflation," Journal of Socio-Economics, 2002 [available at]

Kurland, Norman G., Brohawn, Dawn K., and Greaney, Michael D., Capital Homesteading for Every Citizen: A Just Free Market Solution for Saving Social Security, Washington, DC: Center for Economic and Social Justice, 2002 [available at]

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