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Part 3: Living Income - this should be a critical object of macroeconomic policy


Hector McNeill
Director
George Boole Foundation
[(20200820]:
Hector McNeill
Where it all began

The work leading to the Real Incomes Approach started in Rio de Janeiro, Brazil in 1975. Initially focusing on the impact of the petroleum crisis on the Brazilian economy. Some of this initial work made use of the resources provided by the Getulio Vargas Foundation located in Botafogo, Rio de Janeiro.

The Real Incomes theory and policy propositions emerging from this work have since become a new front in macroeconomic policy analysis, constitutional & development economics.

There is increasing reference to “Living Income” as an essential basic reference for what can be considered to be a minimum necessary level of disposable income. This discussion, in previous times, was more related to development economics and lower income community and country development initiatives. Now, it has become a central issue in discussions on alternative economic policies in high income countries. This is because of the trends in declines in the purchasing power of the currency and therefore an inability of the lowest income segments to purchase their essential needs.

In the cases of low and high-income countries, a relevant domain of economic analysis on this topic is the Real Incomes Approach to economics. This approach is also referred to as RIO-Real incomes objective. Unlike conventional economic analysis that applies the Aggregate Demand Model (ADM), RIO is based on the Production, Accessibility & Consumption Model (PACM). The “accessibility” components refer to the essential need for:
  • access to reliable information on product quality characteristics
  • accessible unit prices
  • continued access to sustainable supplies
In essence, living income relates mainly to the accessibility of unit prices in relation to disposable real incomes.

Inflation

When it comes to low income economic units and the ways owners support their families by being able to afford basic needs, there is a need to analyse, not only the variation in the prices of their essential needs but to also account for the variation in the prices of the inputs to their business activity since changes here will determine the capacity of their livelihood to support, at least, a minimum living income.

It is notable that most discussions on Living Incomes, in the context of low-income rural communities and small farmers, seem to omit consideration of this reality. Corrections for inflation tend to limit consideration to consumer price items but not business input price inflation. Therefore, the insistence on the need to maintain the minimum living income as an objective, becomes disassociated from the means of earning enough to support the level of income necessary. So far, the way living incomes are adjusted to allow for inflation is to apply the Consumer Price Index (CPI) which is an “average” consumer basket adjusted to actual proportions of purchased items in the economy. However, this includes by default, the whole population of high and low-income constituents. Because, for example, food items constitute a higher proportion of expenditures on low income families and also the makeup of their “basket” contains lower-priced and poorer quality items (in relation to health and nutrition) it is readily apparent that the CPI estimate of inflation, as it relates to low income groups, is likely to be unrepresentative. The lack of logistic infrastructures can result in many low-income rural communities paying higher prices for certain food items which further undermines the applicability of the CPI.

There is, unfortunately, a tendency for governments to weight CPI formulae and the content of the consumer item “basket” content, to lower estimates of inflation making the use of the CPI for handling adjustments for “cost of living” somewhat arbitrary (See: If You Want To Know The Real Rate Of Inflation, Don't Bother With The CPI ).

Better standards

The use of Food Balance Sheets that relate to nutritional content of foods and detailed household survey data is the best basis for estimating the purchasing power of available income from all sources. Many low-income agricultural families carry out a variety of other occupations such as charcoal burning and ad hoc employment to maintain their incomes, all of which need to be analyzed. However, the “terms of trade” are also an important measure in any year and these measure the movement in input prices to the economic activity against the movement in unit sales prices of their output. Here, in terms of inputs there tend to be a constant inflationary pressure whereas on the side of farm gate prices, prices can vary up or down by a factor of 2.

Therefore, the reality is that living incomes, in order to become a viable means of ensuring people have a basic minimum purchasing power to satisfy basic needs for survival, needs to be based on a more realistic set of assumptions that are supported by methodologies that can secure a sustainable and less precarious status.

Using the immediate evidence-base is more reliable

Once the effort to collect a data set on the circumstances of an economic unit’s inputs and prices, output unit prices and resulting feasible income have been collected, the most reliable basis for adjusting income is to repeat the data collection each year with the same economic units and families making use of a standardized data set and not rely on “official figures” and such indicators as the CPI. By repeating this exercise data collectors become more acquainted with the finer details of the reality facing such families and this can result in a refinement of data sets and collection methods. To achieve such granularity and relevance by relying on “official statistics” as “alternative sources” of information is essentially a waste of time.

Towards a more viable basis for living incomes

For many years, a source of inflation has been the implementation of the monetary policy target of an inflation rate of 2% as being equivalent to “price stability”. This is the equivalent to a currency devaluation of 18% each decade, which for lower income groups is somewhat disastrous. However, the development work under RIO provided evidence in 19761 that the monetary policy instruments of money supply and interest rates do not control inflation directly as the Quantity Theory of Money (QTM) predicts. Indeed, John Maynard Keynes was of the same opinion.

Proof of this came with the introduction of quantitative easing (QE) after the 2008 financial crisis. QE has been in operation for over a decade while in Japan it has been in operation for over 30 years. Low interest rates and a significant rise in money volumes, based on debt, have resulted in falling demand, investment and productivity. RIO explained this policy failure by analyzing the monetarist’s QTM identity, pointing out that basic equation does not include two of the most important variables of “savings” or “assets” which are non-circulating components of money supply (See A Real Money Theory ). Therefore, the flow of money into assets such as land, real estate, precious metals, corporate shares and offshore accounts has drained the real or supply side economy of circulating funds thereby reducing any ability to invest and pay higher real incomes.

Because macroeconomic policies continue to promote the ADM based on the QTM to this day we will see continued instability under an ever-increasing reliance on QE. This has fundamental implications for those who wish to support the concept of a living income; it is a valid concept. However, at the moment, relying on own efforts to collect the relevant information on an annual basis so as to introduce realistic adjustments, even on the basis of stratified sampling techniques to lower costs, is likely to be too onerous for most NGOs or volunteer groups.

There is a need for a major re-alignment of macroeconomic policies towards RIO, that is, making real incomes the macroeconomic policy objective, so that a general rise in real incomes can help initiate a transition within which NGOs will be able to afford to collect data on an annual basis. And, with sustainable growth, help remove the needs for a large segment of the world’s population to be so reliant on the concept of the need for a minimum living income. Until macroeconomic policies are reoriented towards making real incomes the objective of policy, it is unlikely that living incomes can be implemented with ease. Indeed, macroeconomic policies need to be reoriented to stimulating real incomes to such an extent as to remove the need for the living income concept being a matter of concern.

How extension systems contributed to the problems surrounding real incomes

In the past the agricultural extension systems had a broader role. Extension agent farm visits consisted of a technical extension officer and a domestic economist. In basic terms the extension officer would spend most time with the farmer providing advice on ways to improve productivity. The domestic economist, usually a woman, would spend time with the farmer's wife providing advice on nutrition and how to maximize the purchasing power of available income. Over time, the extension services collected and maintained data on the relative purchasing powers of farming families and were in a good position to estimate what would have been considered to be a minimum living income in their areas of work.

This balance in the role of extension services in helping raise productivity and emphasizing aspects of nutrition and family health was an efficient system. Unfortunately, there has been a tendency for government administrations within which politicians demand visible policy results within a relatively short period, has meant that the significant medium to long term productivity impacts of extension services have been obscured, resulting in a broad global defunding of extension services. In their place attempts have been made to introduce private extension services and surveys of family expenditures have become a topic of academic institutions and NGOs. However, this mix is far less efficient or coordinated than the former extension systems because there is often insufficient cash flow to make private extension services pay when dealing with very small farms, some of which are close to subsistence operations. There is also an issue of some private extension agents becoming commission agents for specific lines of commercial farm inputs leading to a lack of objectivity and independence of advice provided. Because of this commission agent operation it becomes clear that the poorer farms, in most need of help, do not receive it.

NGO and academic surveys of household expenditures are often linked to specific ad hoc funded initiatives and occasionally to PhD student theses topics. As a result there is seldom a consistency or permanency in the collection of such data. Indeed, in the early 2000s a move was taken to replace the extension services in Mozambique with an NGO-based system. Naturally when the funding for this "initiative" was terminated, Mozambiquan farmers found themselves without extension support 2since most of the former agents had to leave to government service as a result of the NGO-based initiative displacing them from their former operational tasks.

Some serious thought needs to be given to the expansion of extension systems along the former traditional lines but absorbing modern techniques of communication which can greatly assist in the acceleration of diffusion of knowledge on better production technologies and techniques. Bringing back the domestic economy function could provide a more permanent basis for measuring and regularly updating living incomes while the ability to earn incomes rises with productivity increases.



1 McNeill, H. W., "The Real Incomes Approach to Economics", Monograph, Rio de Janeiro, 1976.

2 Personal communications from Helder Gemo with the author on 25th August 2006 in Maputo. Also see Gemo, H. and Eicher, C. K., "Mozambique' Experience in Building a National Extension System", Michigan State University,2005.


Posted: 20200820
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  Author:  Hector McNeill:     hector.mcneill@realincomes.org.uk         Source:   DIO:     secretariat@developmentintelligence.org

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