Tuesday, June 19, 2012

Introducing the BMF

We've been saying it for years. If emerging markets don't get a stronger voice in international institutions like the International Monetary Fund (IMF), they may pick up their marbles and play their own game. Well, here it is: The BMF.

No, this is not a reference to Samuel L. Jackson's Pulp Fiction wallet. It's the BRICS Monetary Fund.

As reported by the Financial Times, the governments of the BRICS (Brazil, Russia, India, China, and South Africa) - who have all suffered under-representation in the governance of the IMF - announced yesterday that they will build their own financial safety net, based on the Chiang Mai Initiative. The Chiang Mai Initiative (CMI), itself is based on the IMF - basically it's a Asian version of the IMF (an Asian Monetary Fund). So this is the BRICS version of a monetary fund.... a BMF!

Now, the BMF and the CMI have a long way to go to become full-fledged international organizations. When you build a financial safety net like this, you encourage good governments to take risks by ensuring them that if the global economy is unkind, there's insurance. But you're also inviting bad-credit governments to a bailout, which can create moral hazard.

The IMF's answer to this problem has been "conditionality": in return for a loan, you need to adjust your policies. Conditionality is pretty unpopular - just ask the Greeks... or people who suffered under the East Asian Financial Crisis. It's actually that very crisis that led Asian governments to start their Asian version of the IMF - to escape IMF conditionality. Funny thing is that they worried so much about moral hazard, they ultimately decided that if a government wants to borrow a significant amount from the CMI, it must have an IMF program in place... In other words, the Asian answer to moral hazard was old-fashioned IMF conditionality! As a result, nobody has actually borrowed from the CMI.

So, we'll have to see just where this BMF goes. If there are no conditions attached to BMF loans, then you can be sure that it will be a lot more popular among developing countries than the IMF. Heck, Greece may even be knocking at the BMF door. But zero conditions? That's unlikely. The BRICS don't want to lend away their money to the worst-credit countries in the world with no strings attached.

The question is: What conditions will the BRICS attach? IMF conditionality is ostensibly based on economic factors, but a lot of research suggests that politics matters too. So, will the BRICS use the BMF for purely economic purposes or will the BMF also serve as a tool of foreign policy?

Ok - so, in sum - the BRICS are putting some money into a wallet marked with the letters BMF.

Will they just give their money away, as does Pulp Fiction's Jules Winnfield with his BMF wallet?

Or will the BMF be more like the Godfather, who provides gifts in return for a service?...

Oh yeah! You can bet that this BMF is going to be a lot of fun for me to write about!

Monday, December 19, 2011


The Vreelander Holiday Edition: Looking for an original gift? Here's one that is perfect for someone interested in global affairs from an intimate perspective...

Writing beautifully. Youssef Cohen tells his story as a man searching for memories of his mother, Odette, who passed away when he was just a little boy.

The adventure will take you around the world, from New York, to Venice, Sao Paulo, and Cairo. You won't travel as a tourist, but will be welcomed nostalgically by old friends and family, with all the bitter sweet joy and melancholy these relationships bring.

You will also travel through history: Amsterdam, Syria, Paris, Portugal, Buenos Aires... Wars and crises impose migration as neighborhoods, societies, even countries are crushed then reconstituted, and your friends and family make their lives, finding their way through life around the globe.

Click here for the link on Amazon!

Friday, August 19, 2011

Who's on first?

Listening to NPR morning news today - they're referring to Xi Jinping as Joe Biden's "counterpart." Ok, technically, they're both "vice" guys. But Xi has been pre-selected as the next President of China, meaning that if all goes well, he will become, arguably, the 2nd most powerful man in the world. As for our Vice President, if all goes well, he will never become President.

This inspires me to write up a fun little script that you can play with your kids to help them get a sense of three prominent figures in Chinese politics.

ABBOTT: The newspaper says that Xi will be the next President of China.

COSTELLO: The next President of China will be a woman?

ABBOTT: No, Xi is a man.

COSTELLO: Weird. What is his name?


COSTELLO: I thought you said he is a man.

ABBOTT: He is.

COSTELLO: So what is his name?


COSTELLO: Wait a minute! Just tell me - who is the next President of China?

ABBOTT: No. Hu is the current President of China.

COSTELLO: I don't know who is the current President of China.

ABBOTT: Well, he is.





COSTELLO: Yes is the President of China?

ABBOTT: No! Hu is the President of China!

COSTELLO: I don't know! You said "Yes" is the President of China.

ABBOTT: No, I said Hu is the President of China.

COSTELLO: I don't know! Just tell me, who is the President of China?



ABBOTT: Yes. Hu.

COSTELLO: I don't know. Who?

ABBOTT: Yes. Now that we cleared that up. Tell me, what do you think of Xi?



COSTELLO: The woman?

ABBOTT: Xi is a man!

COSTELLO: Who is a man?

ABBOTT: Back to him? Yes.

COSTELLO: Yes is a man?

ABBOTT: Now you're just talking nonsense... Let's just get this straight. Xi is a man, and Hu is a man.

COSTELLO: She is a man?

ABBOTT: Yes. And the next President of China.


ABBOTT: No!!! Hu is the current President of China!



COSTELLO: And the next President of China?


COSTELLO: The woman with no name, who is a man.

ABBOTT: More nonsense! There is no woman. Xi will be the next President of China. Hu is the current President.


ABBOTT: Yes. You've got it?

COSTELLO: I don't have any idea what you're talking about!!! When will the new President take over?


COSTELLO: Yes, when?

ABBOTT: No, Wen is the Premier.

COSTELLO: Is that what it's called, the "premiere" of the next President?

ABBOTT: No, just the Premier.

COSTELLO: Sheesh. Ok. When is the premiere?


COSTELLO: Him again? I don't want to know who, I want to know when!

ABBOTT: The Premier.

COSTELLO: Yes. When is it?

ABBOTT: That's right.

COSTELLO: What's right? When will be the next President of China?

ABBOTT: Wen will not be the next President of China. Wen is the Premier!

COSTELLO: I have no idea when will be or not be the transition!

ABBOTT: Hu will step down as Communist Party leader in 2012 and as president the following year.

COSTELLO: I don't know. Who?



ABBOTT: Yes, Hu.




ABBOTT: The Premier.

COSTELLO: In 2013?

ABBOTT: Xi will be President.



COSTELLO: The woman?

ABBOTT: No, the man, Xi. Hu is also a man and the current President of China!!!


ABBOTT: Yes!!! Got it?

COSTELLO: I have no idea... I know nothing. When is the premiere? Who is the President?

ABBOTT: That's it!

COSTELLO: That's it?

ABBOTT: Yes, Wen is the Premier. Hu is the President. What do you think of Xi?

COSTELLO: I don't know when! I don't know who!! And I have know idea about she!!!

ABBOTT: Well, then, that puts you about even with most people.

Anyway, you get the idea. Have fun with the kiddies. And if you're too young to know about the inspiration for this, check out this classic clip. (Even if you know it, it's always worth another look!)

Tuesday, August 16, 2011

It's the election, stupid

Many are suggesting that now is not the time to cut spending. Now is not the time to raise taxes. With interest rates so low, we have a golden opportunity to rebuild our public infrastructure – increasing the debt makes sense under current circumstances. And since the economy is so fragile, any hint at fiscal austerity would have an immediate contractionary effect.

Well, of course this is true. But it misses the point. We have an election on the horizon!

Right now may not be the appropriate moment to pay for the stimulus. But we are going to have to pay for it *eventually*. The question is, who is "we"? How are "we" going to pay for it?

This is about distribution. We can cut public spending. Or we can raise taxes. (Or both.)

If we cut spending, let’s be clear about who "we" means: That person who stops by your house every day delivering mail – might take a hit. Those folks who educate your kids – might take a hit. The guys fixing up the roads – might take a hit. Disabled people who rely on government assistance – might take a hit. Old folks on medicare - might take a hit. The people you call during an emergency – police, firefighters, the military – might take a hit. And if you’re in the private sector but have customers who work for the government, you’ll take a hit too – because those customers will stop shopping.

If, alternatively, we raise taxes, people are talking about targeting the rich. So, in this case, "we" means the very top of the income distribution. If you make less than $250,000 per year, you’re out of that group.

Now, if we try to understand the manufactured debt-ceiling crisis in terms of promoting economic growth, it makes no sense. It was bad for growth – period. But if we consider it in terms of income distribution and realize that there is a major election on the horizon in 2012, things come into focus.

Consider some data. The following figure comes from the website of Douglas Hibbs, who has proposed an intuitive "bread and peace" model of winning presidential elections. In this figure, we just have "bread" – i.e., economic growth - across the x-axis. It’s the average rate of growth during a 4-year presidential term – weighted so that the last few months before the election count far more than the previous time period. Along the y-axis, we have the incumbent party’s share of the vote (that is, the share out of the votes cast for the 2 major parties).

The relationship is clear: more growth, more votes for the incumbent party.

The "peace" part of the model is captured by the data-points marked in red, where military fatalities were high, so that incumbent parties lost despite solid economic growth. One thing is clear – if economic growth is low when an election approaches, the incumbent party loses.

So, how do things look for President Obama? Not so good. Here is a picture according to the latest prediction from Hibbs’s model. Note that in this figure, the x-axis combines weighted economic growth with military fatalities. The red point is the prediction for Obama:

If this looks bad for the President, you can be sure that the debt ceiling crisis made things worse. Not only did it contribute to volatile losses in the stock market, it also signaled to the world that the US stimulus is over. If you put through such contractionary policies... voilà, you’ll get a contraction. According to the "bread and peace" model, this will contribute to the Democrats losing the White House.

If you are rich, you face a trade-off. Either your income contracts because your tax rate goes up or due to the manufactured negative shock to growth. If the economy picks up towards the end of Obama’s term, he has a good chance of getting reelected. This means that when it’s time to pay for the stimulus, the Democrats will be in a strong position to raise taxes on the rich. If we can manage to keep growth low for the next year, however, then the Republicans will take over the White House, and taxes on the rich will remain low.

When you think of it this way, the manufactured crisis not only makes sense, it was brilliant. We trade low growth, for low taxes. This is a great trade for us. We may not know where the global economy is going, but we know that raising taxes cuts our incomes. Of course, by "us," I mean the rich.

For the other "us" – the 98% percent of us earning less than $250,000 a year – it was a bad trade.

For more on how governments can take advantage of manufactured economic crises to push through policies that are bad for growth and exacerbate income inequality, see my book: Vreeland, James Raymond. 2003. The IMF and Economic Development. New York: Cambridge University Press. (This book has also been endorsed by the American Medical Association as a non-narcotic alternative sleep-aid. Just read 2 pages. Zzzzz...)

Thursday, August 11, 2011

Imagined Lines Are Not Imaginary

I was traveling last week, so I didn't get a chance to re-post the following. It's something I've been talking a lot about on FB, and I put something together quickly when asked by Joshua Tucker (NYU) and John Sides (George Washington). It's always a privilege to be featured on their blog, The Monkey Cage, which they co-author along with Erik Voeten (Georgetown), Andrew Gelman (Columbia), and Henry Farrell (George Washington). So here is the original Monkey Cage post from 6 Aug 2011, and here is the text:


If we had raised the debt limit with no fanfare, like usual, it would have had no effect – it’s just an arbitrary line.

But if you treat it like a line in the sand, drawing the attention of the world to our unsustainable fiscal situation, and then you fail to cut much spending or raise taxes, you send a powerful coordinating signal to the global herd: It’s time to run.

See, our twin deficits – fiscal and current account – are sustainable only as long as people believe they are. But if people stop believing, then they will start to run from the dollar and from US bonds. If that happens, you don’t want to be the last one left at the party.

Now, we all know that US imbalances are unsustainable. The only question is just how far they can be pushed, and what exactly triggers them to come back towards balance. I have been hoping that they might someday be addressed by China addressing their exchange rate as their economy develops. For a long time, China has benefited from a weak exchange rate against the dollar, as the United States is the main destination of their powerful export sector. But there is another pressure on the rise: competition for scarce resources. At some point, the Chinese government will see that the marginal benefit for the export sector from a weak exchange rate has met the marginal benefit from a strong exchange rate for cheaper oil.

If this day had come before the current mess, then we might have had nice market forces addressing US imbalances – and it would have been a slow and steady soft landing. With the revaluation of the renminbi, US consumers would be able to afford fewer exports from China, and the Chinese would buy more from the United States. A market solution would be nice because domestic politics on both sides of the border were not going to address this. Certainly not the “non-tax and spend” Congress. Our government simply lacked the political will to do what was necessary.

But, dammit, the last thing you want to do is to call attention to the lack of political will! Changing the debt ceiling issue into a global focal point forced Congress to finally put up or shut up. They failed to put up. The way you address a fiscal deficit is to cut spending and raise taxes. Every country that has been subject to IMF austerity knows this all too well. In their arrogance, (some members of) Congress believed the United States is above this logic. Now we’re heading for no man’s land. We have announced to the global herd in a focused manner that the United States lacks the political will to address its deficit. Sadly, this is going to hurt global economic transactions, which many people believe contribute to a more peaceful world. The foolishness of making the debt ceiling a focal point – especially with what is going on in Europe – cannot be underestimated. Hard times are ahead.

Sunday, July 10, 2011

Culture vs. Institutions: The Soccer Edition

Brazil and the United States battled today in soccer. Brazil: a nation of 200 million dedicated exclusively to soccer – perhaps the #1 soccer-nation in the world. VERSUS The United States: a nation that devotes most of its vast resources – its time, money, and best athletes – to... baseball, football, and basketball. Let's face it, we don't even call soccer by its proper name.

But this was also a battle of culture versus institutions. Of markets versus states. And when it comes to supporting sports, markets have a bias towards testosterone. Without government intervention, men have many more incentives than women to devote their lives to sports. And Brazil doesn't intervene on behalf of women. The United States does.

Yes, I'm talking about the 2011 Women's World Cup Tournament.

To understand today’s match, we need a little history of US institutions. In 1972, the United States passed a law called "Title IX," which requires educational institutions to devote equal resources to male and female athletics (or any education program/activity receiving Federal financial assistance).

American universities were spending a lot of money on their men's American football teams, and they wanted to continue to do so. But how can you maintain football expenditures and also find money to spend on women's sports teams? Well, first, you cut expenditures on other men's sports... like men's soccer. (This helps to explain why we lag behind the rest of the world in men's soccer. Title IX implicitly encourages our best male-athletes to play something else.) You also, obviously, increase the money that you spend on women's sports – on any women’s sport you can find.

Title IX thus produces incentives for millions of little girls to play various sports. Think about the incentives for parents to support their daughters. Take my cousin, for example. He was coaching his amazing son to be a bowler. (They’re both really good, having both bowled perfect 300 games on pro-shot lanes.) His younger daughter was tagging along at the lanes, bowling for fun. Somebody in the bowling alley noticed that she was pretty good, so he mentioned something to my cousin. "Ever heard of Title IX?"

This question set in motion a bowling career for Jennifer Vreeland. She wasn't so keen on joining the school bowling team at first. Frankly speaking, it wouldn't have happened without the motivation of her father, who, in turn, was motivated to get her a scholarship because of Title IX. Yet, Jenn grew to love the bowling team. By her senior year in high school, she was team captain and enjoyed self-esteem, camaraderie, and good health thanks to Title IX. Today she is an NCAA bowler on scholarship at St. Francis College. In her first season, she set a new team record, scoring 288 in an important match.

This is a personal anecdote, and there are literally millions more like it across America. Mothers and fathers recognize that by encouraging their daughters to play sports, they give them a better chance of getting into college – and getting scholarship money.

And that brings us back to today's AMAZING victory of the United States over Brazil. Yes, you guessed it. Today, institutions triumphed over culture. And it's not the first time. US women's soccer is a dominant force in international sports. If you haven't heard what happened in today's game... well, find out. This game is one for the movies. I can't do it justice here. Seriously, if you had pitched today's story to Hollywood, they wouldn't have taken it because they would have thought it unbelievable. And the victory is due, in part, to Title IX.

The case I'm making here is not meant to diminish the powerful influence that culture can have. Brazil has a smaller population and a smaller economy than the United States. Still, they have an incredible team, including, arguably, the best player in the world. But Brazil doesn't invest in women's sports the way that the United States does. (Interestingly, the American broadcasters on ESPN questioned just how great Brazilian women's soccer might be if only their country actually invested in it.)

The bottom line is that there are a number of factors that determine how well a country's national team does. The obvious are population size, income, and culture. But one factor that should not be overlooked is government action, especially when it comes to women's sports.

With this in mind, I believe that the United States has one of the greatest soccer programs in the world. Our nation may not yet have won a men's world cup trophy, but we don't really need national teams to inspire boys to play sports. Millions of fans tune in to watch high-testosterone professional league games. Ultimately, sports should promote self-esteem, camaraderie, and good health for the whole population. If you rely exclusively on markets, you only provide incentives for half of your population to play. You should thus judge a nation by the policies it puts in place to incentivize the other half of its population.

Congratulations to the US women's soccer team. Score another victory for Title IX. And God bless the United States of America.

Thursday, June 2, 2011

Leading a Multi-Polar World

Crazy recent events have opened an opportunity for new leadership at the International Monetary Fund (IMF). The Managing Director position has always gone to a European. The United States - which provides the most IMF resources and gets the most votes in return- has been fine with this arrangement. We get the IMF headquarters (just down the block from the White House and US Treasury) and the head of the other major financial institution, the World Bank. The front-runner to lead the IMF is yet another European - Christine Lagarde. But appointing another Western European would be a mistake for the United States.

No matter what happens, the IMF will remain mainly under the influence of the United States. But if we fail to open up the leadership of this institution, then the emerging market world will take the institution less seriously. Then the United States will be in charge of an institution that risks irrelevance, or one that is no longer an International but rather a European Monetary Fund.

Consider how power is distributed at the IMF Executive Board - the body charged with selecting the Managing Director. The United States controls nearly 17%. The European Union, if it votes as a bloc, controls about 30%. The Directorships of Japan, China, Singapore, and India collectively control nearly 17% of the votes. Latin America is weaker - with less than 10% of the votes, and Africa much weaker, with less than 5% of the votes (see here). But the point is that this is not a decision that the United States or the European Union can make alone. At least part of the rest of the world also has to go along. And the de facto approach has to make the decision by consensus.

So, suppose that the rest of the world does go along. Suppose that once again the IMF appoints a European. It won't be because emerging market and developing countries failed to propose alternatives. There are potential candidates from all over the world (e.g., Asia, Africa, and Latin America). Note that the emerging market and developing world can force the issue if they choose. Right now, Europe is over a barrel. Europe needs the IMF. The rest of the world does not.

Ultimately, if we see another European running the IMF, it's because emerging market and developing countries don't really care. If we see another European Managing Director, it will be because the rest of the world doesn't want to bother to mobilize the necessary political capital to overcome the Europeans (which would be substantial). And herein lies the problem. The emerging market world is done with the IMF.

So, we can appoint another European, but we will further alienate the rest of the world from this institution.

The opportunity for the United States is to draw the rest of the world back into supporting this institution - an institution where the United States will still have the lion's share of voting power.

Of course, irrelevance may be the IMF's destiny.

Global financial power is shifting. In the days of bi-polarity and uni-polarity, it made sense for the global hegemon (the United States) to provide the lion’s share of resources to global financial institutions and receive commensurate political control in return. In the new multi-polar world, however, emerging markets will demand more and more political power as they are able to provide more resources. Meanwhile, Western powers will be less and less willing to support an institution where they have declining control. Power at the IMF is on a tightrope.

The logic of collective action suggests that problems can be overcome when there are power-asymmetries, with the most powerful actor providing the public good. As power-asymmetries diminish at the global level so will the political support for a powerful global financial institution.

Yet, the multi-polar world does not spell the end of international cooperation. Power asymmetries persist at the regional level. There may not be a global economic hegemon, but there are regional economic hegemons. And there is increasing political will for Regional Financial Institutions (for a longer discussion, see this piece by Raj Desai and me).

As the relative financial power of the United States continues to decline, so will the power of the global institutions set up at the end of World War II. In a multi-polar world, political and financial power will be more decentralized. This process will speed up if the next head of the IMF is a European. It will return the IMF to its roots: an institution designed for Europeans, led by a European. But the rest of the world will turn away. If the United States wants to maintain the power of an institution where it exercises the most influence, it should not hasten the decline of the IMF. It should, instead, try to draw in the rest of the world by supporting a leader who comes from outside of Europe.

(Considering their lack of voting power, how about someone from Africa? I vote for Trevor Manuel.)

Thursday, December 23, 2010

The Best of Young Spanish-Language Novelists... and Political Economy?

Last week, NPR did a story on the awards of Granta, the prestigious literary magazine, for "The Best of Young Spanish-Language Novelists." The host (Don Gonyea) noticed that Argentina is the home country of 8 out of the 22 total awards. Spain comes in 2nd place with 6 award recipients. That's a lot of the awards, considering that there are over 20 Spanish-speaking countries – most countries had zero award-winners.

When asked about Argentina, Valerie Miles, one of the founding co-editors of Granta en español, suggested the following:

"...Argentina is a country with a very long and strong literary tradition... it also has to do with the fact that it has wonderful bookstores. Some of the really great and really important publishing companies that ran away from Franco's Spain ended up in Argentina..."

I like her answer and would like to take it a step further. Why might Argentina (and Spain) have the best publishing companies, the best bookstores, and the best novelists in the Spanish-speaking world?

I would suggest a general explanation, which draws on the broader literature on who wins international competitions.

When it comes international sports – whether we’re talking World Cup or Olympics – three basic factors matter: population, income, and interest. Let me explain.

Population: more people, more chances that your country will have someone who is great.

Income: mo’ money, mo’ opportunities (with apologies to Biggie). Money translates into better athletics and education.

Interest: here’s where culture comes in. When it comes to soccer, for example, you have to actually care about it to be internationally competitive (sorry China and the United States). When it comes to literature, well, I guess you’ve simply got to have some interesting experiences on which to draw for your writing.

So, I applied these basic ideas to the Granta awards. First, let's consider overall economic size. The recipients were all born between 1971 and 1981. For this time period, Spain and Argentina had the largest economies in the Spanish-speaking world. The GDP of Spain averaged $8.4 billion and that of Argentina $7.1 billion (in constant 2000 $). The next 3 largest economies were Venezuela, Uruguay, and Mexico – Uruguay and Mexico are both home to Granta award winners. The 5 smallest economies were: Honduras, Bolivia, Paraguay, Ecuador, and Nicaragua. And there's only 1 winner amongst them (Bolivia).

Now let's take a broader look at the data by country-income:

And here's a picture of the data by the overall economic size of countries:

To put a little rigor into this, I applied regression analysis to the number of award recipients for each country. (Warning to techies: don't get your hopes up, I'm not going to spend any serious effort on this...)

I took the average population and income (in constant 2000 $) for 1971-1981. (Interestingly, constant 2000 $ fits a little better than purchasing power parity measures.)

To proxy culture, I recalled something a French lit prof in college taught me: il faut la crise pour la création – artists need crisis in order to create. Now, there are plenty of ways to measure crises in the Spanish-speaking world. In the 1970s and 1980s, it had more than its fair share by several measures. I tried number of IMF arrangements and years of dictatorship, but the measure that works best is the number of times that democracy was subverted by a coup. It makes sense – these often combine economic and political problems.

Results? These three variables explain about 50% of the variance. Bigger and richer countries that have seen democracy breakdown are more likely to produce Granta award-winners. For the curious, click here for a set of regression results. There is a lot more I could do with this to make it more accessible for the non-technical readers... but I’ve got Xmas shopping to do. Sorry.

Now, true fans of the Vreelander are, of course, much more concerned with my personal correlation with the Granta award recipients. After all, I was able to use a spurious correlation between my career statistics and soccer performance to predict many World Cup matches this summer. The countries that have done the most for my career also did the best during the first round of the World Cup (but in the second round, my good friend, Martin Gassebner, would remind us that I got beat by an 8-legged monster... twice). The reason for the spurious correlation? Big economies mean better soccer and better universities... and countries with more money in their university system are more likely to be able to fly me over for a visit :-)

So, how does the spurious correlation work out for the Granta awards? Pretty well. I've spent more time working in Argentina than any other Spanish-speaking country. Second place? Spain. After that, Mexico,... and then a lot of zeroes – just like the Granta awards for most poor Spanish-speaking countries. All by itself, the variable measuring the number of days I have spent working in Spanish-speaking countries explains more than 80% of the variance in the Granta awards.

(And I can't help noticing one thing. The economic model does not predict the award for Bolivian author Rodrigo Hasbún. But the Vreelander model kind of does, because my connection to Spain is through the excellent ESADE Professor Pedro Parada of the Georgetown-ESADE GEMBA program... Parada hails from... you guessed it: Bolivia.)

A silly sidenote for the technical readers: When I put the Vreelander variable in the OLS model, it actually blows away the other variables in terms of statistical significance. This does not hold in the more appropriate Poisson model.

Bottom line: Why do more award recipients come from Argentina and Spain than any other Spanish-speaking country? They are the richest and the biggest, and they’ve had enough crises to motivate their craft.

Sunday, December 5, 2010

Enter the Dragon... or Rabbit?

Back in 2009 when I was teaching at Korea University, I asked my Korean friends if they knew that China is shaped like a rooster. They did not. But they proceeded to tell me that Korea is also shaped like an animal... well actually like two animals.

From one perspective, Korea is shaped like a dragon:

From another perspective, Korea is shaped like a bunny rabbit:

For people interested in international relations and national identities, there are two take-aways:

(1) Korea-Japan relations:
My Korean friends explained that if you see Korea as a dragon, it is ready to handle an imperial Japan. If you see Korea as a rabbit, however, then the Japanese islands represent the animal's refuse. (I mean no offense to Japan - I'm just reporting what I was told.) My friends couldn't decide which image they prefer. They like the powerful Dragon-Korea. But they delight in the idea of Japanese islands representing rabbit-refuse.

Either way, the scars of the early 20th century Japanese occupation of the Korean peninsula are still alive in the imaginations of young Koreans. (For a history of the years leading up to the occupation, when Korea was treated as a "protectorate" of Japan, see the work of Georgetown Professor Christine Kim.)

This helps to explain why - even when Japan and Korea have common interests - they rely on the presence of the United States, which acts as a buffer to placate domestic constituencies who may still have hard feelings (see the work of T. J. Pempel). Regional organizations also play a role. Japanese and Korean governments have been able to obfuscate some of the economic assistance that Japan has given to Korea by going through the Asian Development Bank. Japan exercises a great deal of control over this organization, though many other countries, including Korea, are also voting members. (For more on this topic, see this paper, co-authored by my brilliant student, Daniel Yew Mao Lim, as well as the excellent research of my friend and colleague, Christopher Kilby).

(2) North-South relations:
Despite more than half a century of tense and, at times, bloody relations between the North and South, my friends from South Korea can still imagine their country as one. Whether dragon or bunny, the animal has no border dividing it in half. Their imagination pertains to the entire Korean peninsula. Well, at least it did in 2009 when I was last in Korea... I'd love to hear the thoughts of my friends after the most recent round of North Korea's shenanigans. And what I would really like to know is how the youth of North Korea imagine their country...


Hye Jee Cho tells me she was taught that Korea is shaped like a tiger. Hye Jee was my colleague at UCLA, where I was a Global Fellow at the International Institute, and she was doing her Ph.D. Originally from Korea, she is now an assistant professor at the Hong Kong University of Science and Technology. She'll be presenting a paper on the International Monetary Fund at the Fourth Annual Conference on the Political Economy of International Organizations in Zurich this January. She shared this awesome picture from "Strangemaps":

So, Hye Jee recalls what she was taught growing up in Korea:
Koreans believed, from the old days of the Joseon dynasty (1392–1897), that the peninsula was tiger-shaped. But after the invasion by Japan in the early 20th century, the Japanese tried to "downgrade" Korea by conceiving of it as a weaker animal - a rabbit. (Note that Hye Jee does not personally believe that rabbits are inferior to tigers - it's just the story that she was taught.)

Saturday, December 4, 2010

Rise of the Rooster

We all need to know more about China. In today's blog, however, I don't want to get into the litany of facts that others have been covering. Instead, I want to bring up something rather simple: What does China look like?

I mean on the map. The shape of China - what does it resemble?

Everyone in China learns what animal the map of China resembles. But practically no one outside of China knows.

The question came up for me when I was visiting Beijing for the first time a couple of years ago. I found myself in a cafe with some newfound Chinese friends. They could speak English well enough for us to communicate; I was grateful because I don't speak Chinese. Well, somehow, the conversation fell upon my international travels. But my friends did not know the words in English for the various countries of the world. (Funny how the word for "Belgium," for example, doesn't come up when you're learning basic English.)

So, I started sketching a map of the world on a napkin to point out countries. I did a pretty good job with the Americas and an ok job of drawing Europe, but when it came to Asia... well, I just drew a circle where China was supposed to be.

"That's not what China looks like!" said one of my friends, incredulously.

"Um," I said, "I don't know the intricacies of the borders, but I've got the location right: south of Russia and Mongolia, east of the Central Asian countries, northeast of India, Nepal, and Bangladesh, and north of the Southeast Asian countries, west of the Koreas--"

My friend interrupted me. "But China has a very specific shape. It's easy to draw. And it looks nothing like what you drew.

"China is shaped like a rooster!" she concluded.

She drew the rooster on the map, and, sure enough, that was definitely China. I asked her if this is something she came up with herself. She just laughed. It turns out that everyone in China learns this as a child. It is deep-seated in their minds – this is how they imagine their nation to be shaped.

I think that it's taught to children so early in China that they take it for granted. When I ask people from China if they know what the map of China resembles, they simply shrug "of course." But, perhaps because they take it for granted, it doesn't seem to be something that comes up for outsiders. No one I've chatted with from outside of China knows about it. Most people are really surprised by it. Some people mistakenly think I'm making a joke. And almost everyone is struck by how obvious it is, once you point it out.

I should note that ignorance of the rooster connection is something I've found world-wide, whether I ask people from the United States, Europe, Latin America, Africa, Asia... Even people I've met from Taiwan don't know about it. Now, of course, there are some folks who do know. If you Google - China rooster - you'll find plenty of pages. Here's one that came up for me today.

But, ok, so you've learned a bit of trivia. So what? What can knowing the shape of China teach me about international political economy?

One thing that comes to mind is the territorial integrity of China. Chinese people know how their country is shaped, right down to little details.

The capital, Beijing, is at the throat of the rooster.

Harbin is the eye.

Shanghai is on the chest.

The Xizang Autonomous Region (a.k.a. Tibet) is part of the tailfeathers - and it is very much part of the rooster. Try plucking the tailfeathers off of a real rooster and see how fast he gouges you with beak and claws.

And speaking of those claws - some say that the island of Taiwan represents one of the feet - they ask, how long can a rooster stand on one leg? (I ask, can a more moderate conception of the rooster leave Taiwan out?... Or can we someday have 1 rooster with 2 or 3 systems? This may become a central question for the future of international security.)

The territorial integrity of China is important to Chinese governments in part because of the history of empires collapsing following the loss of territory. Let's set aside questions of endogeneity. If this is what Chinese governments believe, then separatist movements will not be tolerated. I learned this from my friend and colleage, Pierre Landry, author of Decentralized Authoritarianism in China: The Communist Party's Control of Local Elites in the Post-Mao Era. On the extent and importance of Chinese nationalism, he recommends China: Fragile Superpower, by Susan Shirk. On the value of Tibet to the PRC, I recommend recent research by my friends/colleagues Andreas Fuchs and Nils-Hendrik Klann (the paper is here). They show that when the Dalai Lama is received by a country's government at the highest level, the country suffers reduced access to Chinese markets - exports to China drop. Check out the story here. (And for my view, click here.)

Finally, the #1 reason to remember the rooster shape is that it is a great way to get young children interested in learning the geography of a country that is going to become even more important over the course of their lives. Also, teach them to ask/state, "who"/"Hu" is the president of China. (They may also have fun with this: "Who is the next President of China? No, Hu is the current President. Xi ("she") is the next President.")

Roosters, wordplays, and China - great fun for the kiddies...

Friday, November 12, 2010

G20 Revisited: ASK IT SAM!

As the G20 Summit closes, I wanted to return to something I posted about over the summer. Once again, we see that the G20 doesn't actually accomplish anything. It is perhaps a useful forum to focus the world's attention on global economic issues, but what is really important about the G20 is not what it does. What is important about the G20 is what it represents: The arrival of the emerging market countries!

If this observation is correct, however, then it's a shame that most people cannot name the members of the G20 (even most scholars of International Relations fail the test). Learning their names will give you a sense of the major players in international relations... and learning who's *not* in is also interesting (see what I said about Iran here).

So, I came up with a mnemonic device to help people remember:


The details are in the previous post. Briefly, the G7 comprises the major players of the last 3 decades of the 20th Century - you should definitely know them. BRIC stands for the 4 biggest emerging markets, you should know them too. EU? That's the seat on the G20 going to the European Union countries not already represented by the G7 (yeah, the EU gets separate seats for Germany, France, Italy, the United Kingdom, and then one more for good measure... also note that there are not actually 20 countries in the G20, only 19, with the 20th seat going to the EU).

That leaves 8 countries. They're the tough ones to remember, so I came up with this word, "MAKTISAS," where each letter stands for one of the remaining countries. The nice thing about it is that it also roughly orders the countries in terms of gross national product (GDP). Buuuut, as many of my friends have pointed out, MAKTISAS only works as a mnemonic device if you can actually remember the made up word, something that has proven to be difficult. Sooo, my good friend and co-author, Raj Desai, came up with an easier acronym to remember:


S=Saudi Arabia
K=Korea (South, duh!)


S=South Africa

So, there you have it:


The full list, in order of GDP (2010 US$ estimates from the International Monetary Fund), is thus:

United States ($14.6 trillion)
Rest of the EU* ($6.0 trillion)
China ($5.7 trillion)
Japan ($5.4 trillion)
Germany ($3.3 trillion)
France ($2.6 trillion)
United Kingdom ($2.3)
Italy ($2.0 trillion)
Brazil ($2.0 trillion)
Canada ($1.6 trillion)
Russia ($1.5 trillion)
India ($1.4 trillion)
Australia ($1.2 trillion)
Mexico ($1.0 trillion)
Korea ($986 billion)
Turkey ($729 billion)
Indonesia ($695 billion)
Saudi Arabia ($434 billion)
South Africa ($354 billion)
Argentina ($351 billion)

*Rest of the EU excludes Germany, France, United Kingdom, & Italy. If they are double-counted, then the total EU GDP is $16.1 trillion

Wednesday, October 6, 2010

The Committees that Rule the World
(Who should lead a multipolar world? Part III)

Last time at The Vreelander, we learned that votes for 187 member-countries countries at the International Monetary Fund (IMF) and the World Bank are out of whack with reality. Advanced industrialized countries have more than their fair share, while emerging market countries are under-represented. But that’s only part of the global governance problem. I think a bigger issue is how the votes of the 187 member-countries are put together to elect the 24-member Executive Boards of the IMF and the World Bank. Who are these guys (yeah, they’re pretty much all guys) helping to rule the global economy?

So, the Executive Boards of the IMF and the World Bank are basically mirror images of each other. Some of the Directors represent single countries – the "great powers" – while the "rest of the world" elects the remaining Directors (elections are held every two years).

At present, there are eight governments with country-specific Directors: the United States, Japan, Germany, France, the United Kingdom, China, Saudi Arabia, and Russia (in order of vote-share).

The "rest of the world" pools their votes into blocs to elect the remaining 16 Directors – and there are no rules. Here’s how things shape up (click the figures for a larger view):

Some things should strike you as strange. Like – why does the guy from li’l Belgium have more votes at the IMF than the guy from France? How on earth could tiny Denmark possibly have more votes than mighty China? And, um, over at the World Bank, the guy from Austria has the largest share second only to the United States??? Are ya kiddin’ me?

What’s going on is that some countries team up as a big voting bloc and elect a very powerful Director to represent their interests. So, out of a bloc of countries, which one gets to have a guy from their country be the leader?

Some groups allow the Directorship to rotate across all members – this is true for the two African Directorships. Other regional blocs are more "hegemonic," with only the most powerful countries in the bloc controlling the Directorships.

Why would a country give its political support to a hegemon?

The case of Spain involves colonial legacies. Spain currently controls an IMF Executive Directorship representing a group of Latin American countries. Spain shares control of this Directorship, alternating with Mexico (the Alternate Director) and Venezuela (the Director at the World Bank).

The Canadian bloc is more geographically diverse, but also follows colonial legacies. Canada partnered early on with Ireland, a fellow former colony of the United Kingdom. The Canadian bloc then took on other former British colonies of the Americas as they became independent and joined the IMF and World Bank.

Then there are blocs that do not exclusively follow regional lines. Iran, for example, leads a bloc at the IMF including Middle Eastern and North African countries, along with Ghana, which was recruited into the bloc in 1973.

Italy is a remarkable case. With more votes than either Saudi Arabia or Russia, Italy has enough votes to elect its own Directorship. Rather than go it alone, however, the government has formed a bloc including mostly Southern European neighbors – Greece, Malta, Portugal, San Marino, and Albania. The bloc also includes Timor-Leste, which is far outside of the regional pattern. By bringing together this coalition, the Director from Italy actually has a greater vote-share than does the Director from China.

The Directorships of the Netherlands and Austria-Belgium are even more outstanding. At the World Bank, they control, respectively, the third and second most powerful Directorships. The Netherlands bloc includes a group of non-obvious partners: Armenia, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Georgia, Israel, Macedonia, Moldova, Montenegro, Romania and Ukraine. Austria and Belgium represent Belarus, Czech Republic, Hungary, Kazakhstan, Luxembourg, Slovak Republic, Slovenia, and Turkey.

And then there is Switzerland. Since joining in 1992, Switzerland has held Directorships at the World Bank and the IMF. Currently, Switzerland represents a hodgepodge group including Azerbaijan, Kyrgyz Republic, Poland, Serbia, Tajikistan, Turkmenistan, and Uzbekistan.

How does Switzerland do it? My research indicates that foreign aid might be helping. This is straightforward political economy: trading money for political influence. Rich countries provide foreign aid to developing countries that offer political support at the World Bank and the International Monetary Fund.

How much Swiss foreign aid is due to Swiss-bloc membership? Consider some statistics from 2008. Total Swiss Official Development Assistance to independent countries was $758 million, and the 6 poor countries in the Swiss-bloc received about 94 million of this – or 12% of the total. Considering that the total population of these 6 poor countries (less than 60 million) accounts for less than 1% of total world population, getting a full 12% is, well, quite a large share of Swiss aid!

Back in 1992 when Switzerland first joined the World Bank and the IMF, the Swiss government worked hard to put together a coalition of other new members so that it could be elected to the prestigious Directorships. By leaving Italy to join Switzerland, Poland earned a promotion to Alternate Director for the Swiss. And the Swiss have maintained a commitment to providing foreign aid to the impoverished members of their bloc. This should come as no surprise to astute observers of Swiss involvement in international affairs. Some policy-makers are rightfully proud of the service they provide for their constituent countries. As they see it, the great power of holding Directorships at the World Bank and the IMF comes with great responsibility.

The question for emerging market countries is this: do they want to get into the game of putting together powerful blocs? I’m sure, for example, that China could put together a supporting cast of countries that would make it much more powerful than the Italian bloc.

The real question is probably this: do emerging market countries even care? See, Western European countries can play all the games they like to maintain their privileged position in global institutions. But if these institutions don’t reflect economic realities about which countries have real power, they may cease to be relevant. Emerging market countries may not yet have the power to take over the global institutions, but they are beginning to run things at a regional level. And thus they may be more interested in focusing their resources on regional institutions.

I will have a paper about this topic that will be coming out soon - co-authored with Raj Desai. For a preview of our views, click here.

As for the IMF and the World Bank, I refer to what I said in Part 1 of this series: they’re in a bind. If the power of the United States and Western Europe is reduced, these countries may be less likely to approve additional funding for the institutions. But if global governance fails to become more inclusive, emerging markets will (continue to) lose interest.

Perhaps this is the signature of a multipolar world, where no one is strong enough to dominate at the international level – and regional hegemons emerge. If this is so, I think a potential solution for the IMF and World Bank is to recognize the growing strength of regional organizations and find ways to engage and work with them.

The Committees that Rule the World
(Who should lead a multipolar world? Part II)

Every two years, representatives of countries from all over the world gather in Washington, DC to elect two committees that partly rule the world on global economic policy. This year, the meetings are coming right up this weekend: October 8-10.

Usually, these elections just rubber stamp the same old usual suspects who have been running things for decades. But the 2008 Finance Crisis has obvious changes in world order. We are now living in a multipolar world, and the emerging market countries have arrived. This time around, they are going to be looking for a bigger share of global governance.

The committees I’m talking about are the Executive Boards of the International Monetary Fund (IMF) and the World Bank, two of the world’s most powerful international organizations. Who controls these institutions? Well, every member-country has some share of the votes, and with 187 countries as members, technically, the IMF and the World Bank are accountable to nearly all of the citizens of the world. But, in reality, the real governance is run by a handful of key countries.

Basically, you’ve got 187 member-countries that elect 24-member Executive Boards (one for the IMF and one for the World Bank). Do each of the 187 countries get one vote? No, no, no – this isn’t the United Nations. Rather, the share of votes is explicitly tied to economic size. So, the mighty United States has the largest share (16.74%), and tiny Tuvalu has the smallest share (0.012%).

But economic weight isn’t the only factor – politics also matter. You see, even though China has just surpassed Japan as the second largest economy in the world, this powerful country has a smaller vote share than France (3.65% vs 4.85%). Yeah, that’s right – France (GDP=$2.7 trillion) has more votes than China (GDP=$4.9 trillion). Think that’s out of whack with reality? How about this? Belgium (GDP=$470 billion) has 2.08% of the votes, but Brazil (GDP=1.6 trillion) has only 1.38% of the votes and India (GDP=$1.2 trillion) has only 1.88% of the votes.

Personally, I think it makes sense that votes reflect economic size. After all, the contributions to the IMF and the World Bank are also tied to economic size. If you give more money, you should get more votes. What’s out of whack is that the votes just don’t reflect current economic realities. Brazil, China, India, Korea,… and the list goes on… are all willing and able to contribute more, but, because this will translate into a smaller share of votes for advanced industrialized countries, like Belgium and France, they drag their feet.

What does it take to change the votes? An 85% supermajority of the current voting structure is required. Yeah, with over 15% of the votes, the United States has veto power, and so do the European Union countries when they coordinate and vote together.

But changing the votes is only part of the problem. In fact, you can be sure that the individual vote shares of the 187 member-countries are going to be revised over the next few days. The United States and the European Union recognize that this needs to change, and it is not news. Emerging market countries have been making small gains for years. So, in 2006, China had only 2.94% of the votes, and now it has 3.65%.

The real question is how these votes translate into seats at the 24-member Executive Board of Directors. Who are these guys? (Yeah, they’re pretty much all guys. See here.) For the answer to this question, and more exciting analysis of global governance, tune in next time at The Vreelander

The IMF Executive Board

Thursday, September 30, 2010

Who should lead a multipolar world?
World Bank visits Georgetown

The President of the World Bank, Robert Zoellick, visited Georgetown University yesterday. I asked him about the future of the leadership of the organization. World Bank lending decisions are partly influenced by US strategic interests (see my research on this here), and this is partly due to US dominance of the governance of the institution. The President of the Bank has always been (de facto) an American, and the Bank is careful to cater to US interests.

I jokingly pointed out, following the observation of The Daily Show, from Wolfenson, to Wolfowitz, to Zoellick, the Presidents of the World Bank appear to be chosen alphabetically. Does this mean that for the next President, we'll return to the beginning of the alphabet, choosing someone like "Another American"? Or is it time for the leadership of the World Bank to go to someone from the emerging market world?

Zoellick gave a good answer. He explained that later in the day, he would visit Congress to report on the World Bank. If the leader of the Bank were not an American, and the United States had less control over the institution, perhaps Congress would be less willing to support it financially. This is a fair point, with backing from related research by Lawrence Broz (here, here, and here). Yet, emerging markets are becoming powerful enough these days that if they don't see change in the leadership of global institutions, they too can abandon them in favor of regional organizations, where they have a stronger voice and more political control.

So, I think that the Bank is in a bind. If it does not make governance more inclusive, it will (continue to) lose the interest of emerging market countries. But if it does away with US power, Congress may indeed be less likely to approve future increases to contributions.

Either way, the global institution risks irrelevance - the threat of which does not actually bother the emerging market world.

Perhaps this is the signature of a multipolar world, where no one is strong enough to dominate at the international level - and regional hegemons emerge. If this is so, I think a potential solution for the Bank is to recognize the growing strength of regional organizations and find ways to engage and work with them.

Friday, September 24, 2010

Regional Games

Saw Invictus. It inspired me.

It's the story of how President Nelson Mandela risked political capital by supporting South Africa's rugby team, the Springboks, which had been a symbol of the apartheid era. Mandela believed that by embracing the team, he could change what the team represented - making it a symbol of a new, united South Africa. He believed that he could help forge a new South African identity - one united behind its sports team as it competed for the World Cup.

In the movie, Mandela receives political advice not to gamble the future of his administration over something as trivial as rugby. Instead, he should be worried about "housing, food, jobs, crime, [the national] currency." But Mandela argues that none of these problems can be addressed without first establishing a new national identity, one that unites people of all backgrounds. This is a tall task.

While dramatizing and exaggerating, the film reflects a political reality. South Africa still has racial problems to deal with, but Mandela left his nation more united than when his administration began. Surely, a lot of his success came from specific policies that impacted housing, jobs, crime, and the value of the national currency. But I can't help think that forging a new national identity was also an important ingredient. And perhaps uniting behind a sports team is an effective way to foment an identity.

A personal anecdote: I grew up hating the Lakers. So, when Kobe Bryant joined the team in 1996, I hated him too... for 12 years. And then came The Redeem Team. Spain was nipping at *our* heals in the 2008 Beijing Olympic Basketball Final. Then Kobe drilled a 3-pointer with about 3 minutes to go, and he silenced the pro-Spain (and anti-American) crowd, shushing them with a finger to his lips (to see it, go to 7:12 in this clip). In that moment, I felt unadulterated enthusiasm for this guy and happily cheered for him. There was no hesitation. Afterwards, it hit me that I had cheered for a Laker - I could only chuckle, thinking, it's a hell of a lot better when Kobe's with you than against you! I'll never forget that victory, and, you know, I don't hate Kobe any more, or the Laker team that he represents. Don't get me wrong - I still don't like the Lakers - I'll always route against them. But hate them? It's hard to really hate a team led by a guy that brought me that moment of victory. Kobe might be Laker, but he's also Team USA.

So this brings me to thinking about a multi-polar world.

Regions around the world are slowly uniting. Europe is the most advanced: goods flow freely, most countries have the euro, and immigration is unchecked across borders. Europeans started down this path seeking peace. They also achieved economies of scale: the European Union is the largest market in the world.

When the economy isn't doing well, many want to retreat from regional integration. This is true across the globe. Yet, these retreats do not appear to derail the forces of regionalization. When the economy picks up again, trade ensues, and regional ties deepen anew.

The political problems are, however, severe, and the forces of regionalization are often impeded by them. Take North America, for example. If the United States is going to compete in a regionalized multi-polar world, we need Mexico. With a nearly trillion dollar economy and over 100 million people, cooperation with Mexico could be a real boon. But problems of poverty must be addressed, and with our 3,000-plus kilometer border, issues over there will inevitably become issues over here.

Yet, while our neighbor is engulfed in out-of-control narco-violence (which is linked to US consumption of illegal drugs), we foolishly talk of building walls and shipping millions of immigrants back across the border. We see Mexicans as "the other." There is a failure to recognize that the destiny of the United States of America is intrinsically linked to that of the Estados Unidos Mexicanos.

In my research, I consider political and economic issues that have impacts across borders on things like housing, food, jobs, crime, the national currency... But when I saw Invictus, it made me wonder. Maybe - to address these problems - we first need a new identity. Economic integration appears to be an irresistible force, but the political problems might be easier to address if people perceive themselves to be part of a region and not just part of a country. Maybe we need to imagine regional identities. And maybe sports competition can help.

So I propose Regional Games. And I'm not talking about intra-regional games, where countries of the same region play each other. No, we've had plenty of that. I'm talking inter-regional games, where North America plays South America, plays Asia, plays Europe, Africa, the Middle East.

Imagine people in El Paso and Juarez cheering for Ortiz as he hits a home-run in the bottom of the 9th to bring Team North America to victory. Or folks in São Paulo cheering for Ginóbili when he hits a buzzer-beating 3-pointer to win the game for Team South America. Or how about this? As an attacking midfielder for Team Middle East scores an overtime goal, people from Cairo to Riyadh to Tehran cheer for their beloved Benayoun.

Crazy? Yep, that's just what they thought of Mandela's idea that blacks and whites could unite behind the Springboks.

Wednesday, July 21, 2010

Hungary and the IMF

I made a guest appearance on The Monkey Cage, along with Grigore Pop-Elches of Princeton University, discussing Hungary and the IMF - thanks to Joshua Tucker, of my beloved alma mater, NYU.

Here's the post, as it is introduced by Joshua:

Yesterday I was somewhat surprised to read that the IMF and the EU had decided to suspend a credit line to Hungary because of concerns over the newly-elected Hungarian government’s budget plans. After all, the recent Hungarian government had come to power in dramatic fashion this spring in part to clean up Hungary’s economic mess. Did this signify a new direction in Hungarian politics, or, perhaps more importantly, a new direction for the IMF and/or the EU in dealing with issues of sovereign debt in Europe?

With these questions in mind, I emailed Grigore Pop-Elches of Princeton University (the author of From Economic Crisis to Reform: IMF Programs in Latin America and Eastern Europe and James Vreeland of Georgetown University (the author of The International Monetary Fund: Politics of Conditional Lending) for their thoughts.

Grigore offered the following observations:

1. A number of analysts claim that it’s “very rare” for the Fund to freeze funding for program countries, which suggests a pretty serious situation. While this may be true for the recent wave of IMF programs following the 2008 crisis (in which both the IMF and most debtor countries have been on their “best behavior”) it is not really a rarity in historical terms: thus, less than half of IMF programs in Eastern Europe in the 1990s were fully implemented, so these kinds of disagreements and punishments are hardly unusual. Moreover, the Fund has signaled its willingness to return to negotiations in September, which means that the program has not completely gone off track. The problem is that Fidesz in unlikely to be willing to make a lot of compromises prior to the October local elections, for fear of further strengthening Jobbik.

2. What’s interesting - and rather ironic from a Hungarian perspective - is that the patterns of conflict between the Orban government and the IMF are actually quite similar to the IMF relations the Meciar government in Slovakia in the mid-1990s. In both cases, the conflicts were driven less about the broad parameters of fiscal adjustment, on which both governments were fairly close to the targets but about relatively minor populist measures - the bank tax in Hungary and the import surcharge in Slovakia - on which the two populist leaders were unwilling to compromise.

3. The other thing driving the current standoff is that ultimately Hungary’s crisis is not that critical in the short term - they still have enough reserves and decent financial market access - which gives both the government and the IMF (and the EU) room to stick to their positions without fearing an immediate meltdown. But as reserves diminish and the cost of lending goes up in the fall, the Hungarian government will have less maneuvering space and will probably be more willing to compromise. On the other hand, if things get bad enough, the EU may decide that one of the lessons from Greece is that earlier intervention is cheaper in the long run, which could soften their own demands for additional fiscal austerity.

James wrote:

The International Monetary Fund has returned to its roots: lending to Europe. Some have suggested that the European Union needs its own European Monetary Fund, so that its governments do not have to turn to the IMF. But what would such an “EMF” bring? They already have the European Central Bank, with ample lending resources. The answer is “conditionality”- the quid-pro-quo of loans in return for policy reform. Right now, the IMF is playing hard ball with Hungary, whose government is not willing to implement the level of austerity recommended by the Fund. This is a warm-up for what may be coming with Greece down the road, if its government decides it can’t live up to the budget cuts required in its IMF arrangement (see here). And you can bet that politicians in Italy, Spain, and Portugal are paying attention to see just how strict (or not) the IMF will be. Ultimately, most of the loans and prospective loans for these countries come from other European governments - mainly France and Germany. It is in their interests to keep these countries afloat — major exporters to the European countries in trouble are surely pressuring their governments to lend. But they also have concerns about inflation and moral hazard. For a generation, the German Bundesbank towed the hardline, and the German government - urged by inflation-averse voters - continues to crack the whip. But as Europe has moved into a new phase with the Eurozone, it may be more politically palatable for the rest of the EU to launder these ugly politics through another international institution. That’s what the IMF is doing - the IMF can be the bad guy - forcing governments to make tough choices. The IMF provides an institutionalize mechanism by which liquidity is provided in return for policy reform. Compliance is not always forthcoming, especially with strategically important or politically powerful countries, but for countries like Hungary and Greece, conditionality can have a real impact.

Some further Vreelander thoughts:

It will be interesting to see how far the Managing Director of the IMF, Dominique Strauss-Kahn, will want to push austerity. He is from the Socialist Party in France and may have aspirations to run for president (for a discussion of this and of his performance at the IMF, in French, see here). He's not a big austerity guy. So, Germany may have a reluctant whip-cracker. Still, I think the IMF Executive Board preferences will prevail. And when it comes to Europe, I suspect that Germany will hold sway in those behind-closed-door meetings.

As for the "bad guy" link above, it amuses me because it casts the IMF as the "Batman," Germany as "Alfred" (or "Gotham City," if you will), and Hungary/Greece/Italy/Spain/Portugal as the "Joker." A disclaimer: while a lifelong fan of Batman fiction, I neither condemn nor condone the IMF - I am a neutral observer in real-life.

IMF: People are dying. What would you have me do?

Germany: Endure. You can be the outcast. You can make the choice that no one else will face: the right choice. [Europe] needs you.

Greece (to Germany): A little fight in you. I like that.

IMF: Then you're gonna love me.

Germany: Now that's more like it, Mr. [Strauss-Kahn].

Hungary: It's all part of the plan.

IMF: Com'on!

Hungary: Hit me!

Spain & Greece: Let's put a smile on that face...

(To see it all 1960's style, click here.)

Friday, July 9, 2010

Vreelander: The Reckoning

After humiliating defeat at the (eight) hands of Paul the Octopus, The Vreelander has a final chance at redemption in the World Cup 2010.

The Psychic Squid has predicted Germany over Uruguay for 3rd place, and Spain over The Netherlands for 1st place.

Paul and I agree on Germany. But we disagree on the final. The Vreelander is with The Netherlands!

Paul's decision is based on ... nothing ... He takes food out of one of two boxes marked by the flags of the competing countries. And Paul has called every game correctly when it comes to Germany this WC. He lacks experience, however, when Germany is not involved...

The Vreelander decision-rule is based on a spurious correlation which links size and economic strength to university-strength and soccer-strength. Out of loyalty to my colleagues and students, I root for the country that has contributed the most to my career. Amazingly, the decision-rule has a current game-by-game record of 40 correct predictions, 8 incorrect, and 14 ties.

Analysis of Uruguay-Germany

I am indebted to Uruguay:
A piece I wrote was translated and published in Uruguay by Diego Aboal and Juan Andrés Moraes.

But look what Germany has done for me:
Not one, not two, but three publications with a German co-author (Axel Dreher). Plus, not one but two working papers with three other German co-authors (Martin Gassebner, Stephan Klasen, and Michael Lamla).

Plus I've given nine presentations in Germany.

Analysis of Netherlands-Spain

Spain has done more for me than most countries:
I have been teaching in a joint Georgetown-ESADE program. ESADE is a top-ranked business school with campuses in Barcelona, Madrid, and Buenos Aires. I've also given a talk at Institut Barcelona d'Estudis Internacionals (IBEI). Plus, my friend and colleague, Covadonga Meseguer cites me in her book (which I endorsed).

But the Netherlands has done a lot to earn my loyalty:
I have not one but two publications with a Dutch co-author, Jan-Egbert Sturm. One of these publications just won an award. Plus we have an additional working paper that we recently posted. Finally, the Dutch Finance Ministry sponsored a trip for me to Amsterdam to take part in a conference on reforming the Bretton Woods Institutions.

And I have my Dutch colleague, Erik Voeten, who not only promotes my career, but also my blog over at The Monkey Cage. Erik has also pointed out that The Vreelander owes its identity to Holland. As I am a descendant of the original Vreeland, my name comes from a village in the Netherlands. Conclusion: GO ORANGE!

The bottom line is that I have been fortunate in my career, receiving a great deal of international support. At the end of the day, Paul the Octopus and I both base our choices on what we "eat," and I have benefitted from the generosity of many countries. It's been so much fun rooting for all of my adopted homes. I love you all!

Wednesday, July 7, 2010

The Vreelander versus the Psychic Squid!

Tune in later today for an unfathomable battle of good versus evil:

The Vreelander versus the Psychic Squid!

Yes, the World Cup has come to this.

I have boldly predicted a victory for Germany based on 3 publications with a German co-author - plus working papers with 3 other German co-authors - and none with Spanish scholars.

But the Psychic Squid has chosen Spain for victory.

I have science plus a spurious correlation on my side. But Paul the Octopus has destiny on his.

Will fate triumph over freedom of choice? Or can The Vreelander defeat the Octopus? It is now just a matter of time till we find out.