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!

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.

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.

Sunday, June 20, 2010

The G20 and MAKTISAS

Why should you care about the G20?

The G20 represents the arrival of the emerging markets!

The 2008 financial meltdown made clear the reality of a multipolar world. The United States, while still the strongest country in the world, ain't what it used to be. And there are a number of new important players in international affairs.

So, even if the meetings produce nothing more than photo-ops and media frenzy, the G20 makes a splash when it meets.

Funny thing is, I have never found anyone who can name the G20. And I'm not just talking about people I meet on the street or even my wonderful students. I'm talking about fellow professionals who teach international affairs for a living.

This is a reflection a few things, I think: (1) The G20 doesn't really do anything. (2) The selection process was arbitrary and membership is already out of date. (3) The group is just too big to be effective (which, by the way, may be by design).

Still, learning who is in the G20 - and who is not - is a good way to get a sense of the mightiest countries on the horizon. Note, however, that the G20 does not actually reflect the largest countries in terms of Gross Domestic Product, so it's important to pay attention to a few countries who are out.

First, who's in?

Let me give you a manageable way to remember them in 4 easy steps:


Start with the G7.
You should already know these countries if you have been paying attention to the world of international affairs for the past 30 years or so. But, just in case, they are:
The United States of America
The United Kingdom

(2) Add BRIC:

(3) 11 down... so 9 countries to go, right? Wrong!
Only 8 more to go because the G20 only has 19 countries.
The 20th member is:
The European Union.

(4) So who are the remaining 8? They are... MAKTISAS!
S-audi Arabia
S-outh Africa

So there you have the G20 in 4 easy steps:


No more excuses - this is easy to remember. And don't worry, the G20 has stated it will keep the same membership.

That's good news for remembering these countries... but bad news for global governance. Just like the current international institutions, the G20 is destined to become out of sync with economic reality. Indeed, it's already out of sync.

Who's out? Again - 4 groups:
(1) EU Countries, (2) Other European Countries, (3) The Bad Guy, (4) Good/Bad Guesses

(1) EU countries
There are EU countries that are big enough to be in the top 20, but they're not G20 because there'd just be too many Europeans around the table. Personally, I would like all the EU countries - or at least the Eurozone countries - to unite as one voice. An EU voice would be the largest, most powerful at the table - surpassing even the United States... but that's not going to happen. Germany, France, the UK, and Italy are in, and they don't want to give up their individual seats. Who's out?
The Netherlands

(The remaining EU countries are too small - they wouldn't get an individual voice anyway.)

(2) Other European countries
There are two remaining countries of Europe that could have top 20 status (depending on how you measure), but they are not in the G20. The reason is the same as above - there'd be too many Europeans. But unlike the previous group, this group really loses out, because they don't even have nominal representation through the EU seat because they're not members of the EU:

(3) The bad guy
So here's a game I like to play. Name a country whose GDP (measured in either nominal or PPP terms) is larger than that of G20 members South Africa and Argentina, but who is not in the G20 and is not a country in Europe... At this point, people start throwing out names of countries. I've never had anyone guess right at first, and I often offer the following hint: When I tell you the name of the country, it will be obvious why the country is not in the G20. At this point, clever people get it. The answer is...

(4) Good/Bad Guesses
Finally, I'd like to list some countries that people often guess and address the merits of those guesses.

Bangladesh & Pakistan: These countries are very poor, so they don't meet the GDP criterion. But their populations are, well, huge. They each constitute at least 2% of global population. These are wrong, but good guesses.

Nigeria: The most populous country in Africa. At nearly 155 million people, it's much larger than South Africa (about 50 million). But South Africa is far richer, and its GDP is thus way bigger. That said, neither of these countries is really a top 20 economy. South Africa is in the G20 to have balanced representation - we want at least one country from Africa.

Egypt: It's got the 2nd largest economy on the African continent after South Africa. So, a good guess for Africa, but no cigar.

Thailand: Excellent guess. It's economy is bigger than that of South Africa in PPP terms (though not in nominal terms). And it's smaller than Argentina... and we needed a country from Africa.

Taiwan: Economically, a good guess. Politically, a terrible guess. Its PPP economy is bigger than that of Saudi Arabia, Argentina, or South Africa. But this country will never play a big role in global governance. The answer in three letters: P.R.C.

Venezuela: Depends on how you measure its GDP. In nominal terms, it's bigger than Argentina. But in terms of what you actually get for your money - Purchasing Power Parity (PPP) - it is not. Venezuela doesn't make the cut. And with Chavez at the helm, well, I wouldn't hold my breath for an invitation - remember, the United States is still the biggest kid on the block.

Israel: I hear this one a lot, but it's a terrible guess. Israel is, of course, strategically important, and because it is a nuclear state, it is militarily powerful. But it's citizens are not that rich (Israel makes the top 30 for GDP/capita, but not the top 20), and its population is tiny (around 100th in the world, making it median-sized). As for its GDP, it is significantly smaller than South Africa or Argentina. Israel is just not even close to being a top 20 economy. The fact that I have heard so many people guess this country shows just how out of sync people are when it comes to Israel's economic weight.

North Korea: Another terrible guess that I hear a lot. Again we have a strategically important country with nuclear ambitions. But this country is small. Just 20 million people... and it is poor! So GDP turns out to be ranked around 100th in the world - this is a median-sized economy.

Now, to conclude, it's useful to go through the countries above one more time, giving a rough sense of their economic size and their population. Together, these two factors can give you a sense of how rich their citizens are: GDP/capita. This variable has been shown to be a powerful predictor of many phenomena, from civil war to the survival of democracy and respect for human rights. I won't give you the exact figures - the point isn't to memorize numbers. Rather, I'll give you a sense of the "order of magnitude" - you should be able to remember the ball park range for the most important countries in the world:

GDP (in PPP terms):

The >14 Trillion PPP Dollar Club
The European Union
The United States
(In that order. See how powerful Europe would be if it could speak with one voice?)

The >10 Trillion PPP Dollar Club
(Still would be a powerful voice.)

The >4 Trillion PPP Dollar Club

The >2 Trillion PPP Dollar Club
United Kingdom

The >1 Trillion PPP Dollar Club

The >500 Billion PPP Dollar Club
Saudi Arabia

Note: South Africa is the only G20 country not to make the >500 Billion PPP Dollar Club.

Population (here I list only countries that were discussed above - in most cases, rounded to the nearest 5 million):

The >1 Billion People Club
China (1.3 billion)
India (1.2 billion)

The >500 Million People Club
No one. See, China and India really dwarf the rest of the world when it comes to population.

The >300 Million People Club
United States (310 million)

The >200 Million People Club
Indonesia (230 million)

The >150 Million People Club
Brazil (190 million)
Pakistan (170 million)
Bangladesh (160 million)
Nigeria (155 million)

The >100 Million People Club
Russia (140 million)
Japan (130 million)
Mexico (110 million)

The >70 Million People Club
Germany (80 million)
Egypt (80 million)
Iran (75 million)
Turkey (75 million)

The >60 Million People Club
France (65 million)
Thailand (65 million)
United Kingdom (60 million)
Italy (60 million)

The >40 Million People Club
Korea (50 million)
South Africa (50 million)
Spain (45 million)
Argentina (40 million)

The >30 Million People Club
Poland (40 million)
Canada (35 million)

The >20 Million People Club
Venezuela (30 million)
Saudi Arabia (25 million)
North Korea (25 million)
Taiwan (25 million)
Australia (25 million)

Monday, April 26, 2010

Moral Hazard & Conditionality: The Gods of this Greek Tragedy

So here it is: the long-awaited, much anticipated bail out of Greece. Was there really ever any doubt? I guess there was a little - that's why Greek bond yields went up. But the break-up of the Eurozone? Com'on - wasn't gonna happen.

So why has this been such a tragedy? Why the bickering back and forth about whether Greece will get a bail-out and who will do the bailing?

The answer has to do with "moral hazard" and "conditionality."

Moral hazard rears its ugly head any time actors are insured against a risk.

Imagine how people would drive if they were completely insured against any damage to their cars - answer: a little more recklessly.

The auto-insurance industry deals with potential moral hazard with lots of institutions: deductibles, higher premiums for folks with poor driving records, different rates for different types of cars and drivers.

Imagine the kinds of risks that banks might take if they were completely insured against risk by the government... hmmm... Imagine - it isn't hard to do.

Why, they'd take risky bets, lending to people who had little chance of repaying - and then when the loan repayments didn't come, well, they'd just get bailed out by the government.

So, how do we address this kind of moral hazard? This one is tougher. See, if the big banks fail, we all suffer. That's what "too big to fail" is all about - we don't have a credible commitment to let them fail... unless we are willing to allow the whole financial system to fail - that is, none of us eat. Since we don't want to go hungry, and the banks know this, they understand that they are just too big to fail.

Congress is trying to figure out away to deal with this moral hazard. Their solutions have to do with passing preemptive laws. One law could be to require banks to lend less and keep more money in their vaults (this is what "deleveraging" and "capitalizing" are about). Another law being considered is to keep banks small. The financial system can survive if small banks collapse. so we've got a credible commitment to let them fail. Knowing this, the small banks will not take undue risks.

Now, imagine how governments would act if they were completely insured against the risk of defaulting on loans. Why, they'd borrow and borrow and borrow... and they'd never worry about paying anything back... Yeah - imagine that. Well, this is what Germany has been imagining lately... it's been a nightmare thinking about the signal it sends when Greece is bailed out. Portugal, Spain, Italy - they'll all realize that they can borrow and spend without limit, and in the end someone will bail them out. How, then, can Germany deal with this kind of moral hazard?

The answer: Conditionality. Conditionality is just a quid pro quo. You want loans? You've got to change your ways. We'll give you a li'l slice of the loan upfront. But before giving you the next slice in a few months, we're going to check your policies. If you're still misbehaving - eating more than your earning - we'll hold up the next installment of the loan. And that will be ugly. You won't be able to pay government workers or deliver public services. Investors will run scared from your country, and no one else will be willing to lend to you. You won't eat.

Note that conditionality attacks a country's very sovereignty. The "conditions" of the loan have to do with government taxes and spending - the very essence of politics. It is as though the lender has suddenly entered into a country's political arena. And when taxes go up while spending goes down, there are lots of people who lose - people who won't be very happy about conditionality.

So who's going to impose conditionality?

Germany & the Eurozone have the money to lend to Greece. And they likely have the credibility to crack the conditionality whip. But this is dirty work. Germany would be seen as the bad guy in Greece - indeed throughout Europe - if it were dictating to the Greek government how to run Greece. If only there were some kind of smokescreen that Germany could use... where they call the shots, but make it appear that someone else is cracking the whip.

That's where the International Monetary Fund (IMF) comes in. See, the IMF has been doing conditionality for years and years. And while the United States is the largest single vote-holder at the IMF, the combined power of the Eurozone easily surpasses American might. So, the Eurozone will be calling the shots. Bickering amongst Eurozone members like France and Germany can take place behind the secret doors of the IMF Executive Boardroom. And whatever emerges will be IMF policy.

So, be on the look out for protest signs in Athens bashing the IMF in coming months. Some will surely see through the IMF facade, realizing that Germany is really calling the shots. Others will see that Greece really sacrificed its sovereignty the day they gave up the drachma in favor of the euro. But the real devil here is moral hazard. And the solution conditionality.

Saturday, April 10, 2010

Foreign Aid, Fractionalizers, and V-Graphs on The Vreelander

Last month I was privileged to participate in a conference on foreign aid at Oxford University.

Why do governments provide foreign aid? To which countries? And with what effects on economic development?

These are questions we considered. The participants included academics, like me, as well as practitioners - and people who straddle both worlds. Now, sometimes we academics have trouble expressing our nuanced ideas in a readily accessible format for a broad audience. This is why I was happy to see an innovative way to present the results of sophisticated data analyses with a picture - and the name is just perfect for The Vreelander: V-Graphs.

Two graduate students from Columbia University, Jordan Kyle and Elizabeth Sperber, presented research they've done with Jonathan Blake on "foreign aid fractionalization." What is "fractionalization" about? Well, sometimes donor countries give a lump some of aid to a developing country to be used for a broad range of purposes, but other times, donor countries "fractionalize" their aid into small packages for a number of very specific projects.

Just about everybody who studies foreign aid condemns "fractionalization." It increases transaction costs, places additional costly burdens on the bureaucracy, and limits the use local knowledge to respond to changing circumstances.

So why would a donor country "fractionalize" aid?

Blake, Kyle and Sperber suggest that it may be a question of how much the donor trusts the developing country's desire and ability to use the aid effectively. The more the donor trusts the recipient, the more of a "lump sum" that may be provided. If the donor doesn't trust the recipient, the aid may be "fractionalized" so that the disbursements can be micromanaged from afar. If a developing country has a highly-reputed effective bureaucracy, a donor may trust it to do a good job, but if the country's bureaucracy is known to be inept, the donor may "fractionalize."

The scholars test this hypothesis on a wealth of data from many different donors. They find that the effect of the developing country's bureaucratic quality influences different donors in different ways. Lately, the United States, for example, fractionalizes aid less for developing countries with high-quality bureaucracies, and fractionalizes more for the developing countries with low-quality bureaucracies, just as one would expect. But not every donor country follows this pattern. Many countries don't seem to care about the bureaucratic quality of recipient countries. And still other countries - like France - actually fractionalize more for the high-quality bureaucracies and less for the low-quality bureaucracies. (Why would the French do this? A mystery.)

I could go on listing the effects country by country, but Blake, Kyle and Sperber have a better way to present the results with a picture - the V-Graph!

Just a li'l bit of background: when we perform statistical analyses, we look for two things: (1) the direction & magnitude of a correlation (positive, negative, or neutral) and (2) how strong the relationship is - that is, whether it's "statistically significant." These two concepts are presented as the "coefficient" and the "standard error." Roughly speaking, the "coefficient" is a summary of the best fit of a relationship - sort of like a mean or average. The "standard error" is a sense of dispersion... or how many of our cases really come close to the best fitted relationship - sort of like a standard deviation. In the social sciences, we often look for relationships that are statistically significant at the 95% level... That means we're 95% certain that we would not have estimated a given coefficient if the real relationship is just zero... 95% significance is indicated when the size of the coefficient is about twice size of the standard error (more precisely, the ratio must be 1.96 or greater). Blah blah blah...

Whoah! Did I lose you in the previous paragraph? No problem. All you need to know is that the relationship between foreign aid fractionalization and bureaucratic quality might be either positive, neutral, or negative. The V-Graph summarizes all this in three partitions:

(Click the pic to make it bigger.)

If a country lands in the red part, the relationship is negative and statistically significant. (Higher bureaucratic quality => less fractionalization, like we might expect.) In the yellow part, the relationship is neutral or null - it's not considered statistically significant. (Bureaucratic quality doesn't influence these donors.) And in the green part, the relationship is positive and statistically significant. (Higher bureaucratic quality => more fractionalization - this is strange.) So, the graph conveniently summarizes the different ways donors consider the bureaucratic quality of recipient countries. You can easily see that for the USA the effect is negative - the United States "fractionalizes" its aid less for countries with high quality bureaucracies that it trusts to do a good job. The effect for IRE is neutral - Ireland doesn't seem to care about the bureaucratic effectiveness of recipient countries. And the effect for FRA is positive... strangely, France fractionalizes their aid packages more for the countries with high-quality bureaucracies. (If you're unfamiliar with the abbreviations for some countries, this page might help.)

From a substantive point of view, the question of fractionalization is important. Breaking up aid into small projects can overburden a developing country's bureaucracy and can be an inefficient way to provide aid. (See, for example, Nancy Birdsall's work on this.) So, we want to understand why donors choose to fractionalize. There is a lot more to it than I've touched on here - I recommend checking out the full paper.

And for statistically-minded folks who'd like to use V-Graphs to present their findings, the code is available here, on Jordan Kyle's webpage. So nice when a scholar provides a public good like this :-)

Friday, March 19, 2010

Say Goodnight to the Bad Guy! Germany, Greece, and the IMF

The Financial Times reports today, "Berlin shifts stance on IMF role in Greece."

So, one day Germany says it won't bail out Greece.
Next day, Greece says it’ll go to the International Monetary Fund (IMF).
So then, Germany says it doesn't want the IMF messing in the eurozone.
Next thing you know, Germany says the IMF-option is back on the table.

What's going on here?

Somebody's got to be the bad guy.

Somebody's got to provide liquidity to Greece, but also make sure that all this money doesn't simply go towards subsidizing the bad policies that got Greece into this mess in the first place.

Changing policies means imposing painful austerity on Greece. Eventually, this might entail raising interest rates, placing ceilings on public credit, cutting public expenditures, and raising taxes. The value of the euro might also slip... which is why the onus of having an outside actor - the IMF - is distasteful to Germany. Oh - and the bad guy's got to slap around Greece bad enough to scare Spain, Portugal, maybe even Italy, or it might have to play bad guy in those countries later...

So then who will be the bad guy? Who will crack the whip?

The Greek government will get plenty of blame ... they'd like to spread some of it around.

The German government has been getting blame from throughout Europe for austere monetary policy for generations.

How about bringing in the IMF so they can share some of the blame as things go from bad to worse, as they surely will?

Note that by bringing in an international organization with as obscure governance as the IMF - whose membership includes all the countries in the world, and few understand who's really in control... many just figure it must be the United States - governments can obfuscate the responsibility for painful policy choices.

The IMF may yet have to play Dark Knight in this Greek tragedy - making the tough choices.

Why should my US audience care?

Well, we've been running a structural deficit for so long, our national debt is rapidly approaching 100% of our over 14 trillion dollar gross domestic product. A really big chunk of this debt is owed to China.

Some day - perhaps some day soon - we will have to pay the piper. We'll be the country that is raising interest rates, cutting public expenditures, raising taxes. Our government will look to scapegoat someone. We'll look for a bad guy. Of course, the IMF is too small to bail us out. They don't even have one trillion dollars, much less ten. So, we'll have to be more creative in painting the picture of a bad guy. We'll have to come up with new obscure ideas, like "currency manipulator" or "protectionist" ... maybe we'll just resort to ol'fashioned US xenophobia. Yeah, we'll probably just blame the folks who lent us the money in the first place. China'll be our bad guy.

You need the bad guy,
so you can point your *** fingers...and say, "That's the bad guy."
So...what does that make you? Good? You're not good.
You just know how to hide...how to lie.
Me, I don't have that problem.
Me, I always tell the truth.
Even when I lie.
So say good night to the bad guy!
Come on.
The last time you gonna see a bad guy like this again, let me tell you.

With apologies to Oliver Stone, Brian De Palma, and Al Pacino.

For more on these themes, see:

(1) Scarface (1983)
(2) The Dark Knight (2008)
(3) The IMF and Economic Development (2003)

Wednesday, March 17, 2010

One stone, four birds... Greece, Germany and the European Union

Thomas Meaney (Columbia University) and Harris Mylonas (George Washington University) have an interesting take on the Greek tragedy in the European Community:

"What hasn't yet shattered the EU just might make it stronger."

This is particularly true for Germany. They argue that the German dithering over what to do about the financial crisis of Greece - and by extension, the Eurozone - was actually strategic. Allowing the crisis to come to a head - threatening to tear the European Union apart - actually benefits Germany in four ways:

(1) The crisis has caused the Euro to depreciate which will help German exports:
"Germany has been hamstrung by a weak dollar and even weaker Chinese yuan. The devaluation of the euro relative to the dollar in the last three months by more than 10% has helped German exports recover from a devastating 19% drop in 2009."

(2) The crisis may help Germany see one of their own nationals elected to head the European Central Bank:
"The candidacy of the longtime favorite, Italy's Mario Draghi, has been severely compromised by his close ties with Goldman Sachs and its role in helping the Greek government's attempt to conceal the full extent of its debt. Now Axel Weber, the current Bundesbank president, leads in the running, putting the Germans in a much better position to have one of their own head Europe's leading financial institution."

(3) The crisis - especially the fact that Europe allowed Greece to languish before agreeing to come to the rescue - has sharpened the German whip it's been cracking at other debtor countries like Spain and Portugal:
"Germany now stands on much firmer ground when it comes to haranguing debtor nations in the Eurozone to get their books in order."

(4) The crisis had increased support for the German stand against expanding the Eurozone:
"EU nations such as Estonia, Latvia, Lithuania and Denmark, which have not made it into the inner sanctum of the Eurozone, will now face a much longer wait."

So while Germany seemed to struggle on the world stage as the financial meltdown in Greece threatened to wreak havoc on the rest of the German-led Eurozone, Germany may actually stand to improve its position in Europe. And if what's good for Germany is good for the European Union, then this story may yet have a happy ending.

The piece by Meaney & Mylonas appeared March 15, 2010 in the Los Angeles Times.

Friday, March 12, 2010

Gotta catch 'em all!

Prime Minister Hatoyama announced today that the yen is too strong and said that the exchange rate should be left to the markets...

But, of course the value of the yen should be left to markets! That's the whole point of a floating exchange rate. So why the announcement and why is it a headline in the Financial Times?

Well, this is sort of like when a passive aggressive friend tells you, "I can't decide for you if you should come to my party, you must make the right decision for yourself." Oh, and now imagine that your friend adds, "I wouldn't hold it against you except in extreme circumstances..."

For, the FT article goes on to say that PM Hatoyama added that markets should determine the exchange rate, "except in cases where there were sudden moves in the market that did not reflect the fundamental value of the currency" [quoting FT, not PM Hatoyama].

Basically, the Prime Minister is throwing a little uncertainty out to markets about what the government might do. And considering that his party's sweeping electoral victory last year represented an historic shift in power in Japanese politics, there isn't much track record to judge.

Now, the announcement is unlikely to shatter markets - the FT reports that the yen only weakened slightly following the Prime Minister's comments. And the government will likely not take any real action to lower the value of the yen.

Still, the announcement itself is a li'l bit of an action. The government does not want to see the value of the yen appreciate. A weak yen would be good for the strong export-oriented sector in Japan. A dropping yen would do much more to help Toyota sales, for example, than any further appearances from Mr. Toyota himself. The weak yen would make Japanese automobiles, electronics, etc. cheaper for people abroad (e.g., Americans), and it would make imports more expensive for Japanese consumers.

Let's take a broader perspective: The financial crisis in 2008 weakens the dollar. The Chinese renmimbi is pegged mostly to the dollar, so its value drops. In relative terms, this makes the euro and the yen stronger... Now, with the Greek tragedy playing out, the value of the euro drops. So, investors (and speculators) are looking to see what currency will keep its value... And, by the way, if we all coordinate on buying the same currency, we'll have a self-fulfilling prophecy. The value of whichever currency we all coordinate on will rise accordingly.

So, Prime Minister Hatoyama's headline is really just a message: the buck does not stop here either!

Now, under the old days that led up to the Great Depression, governments had fixed exchange rates and played dirtier. They engaged in outright competitive devaluations, and this beggar-thy-neighbor approach caused things to spiral out of control. A weakened currency can boost an economy, a valueless currency not so much. With major currencies on floating exchange rates, movements are gradual, and the games that governments play are subtle. That's good for all of us.

Yet, if we don't trust the dollar to rise, and we don't trust the euro to rise, and we don't trust the yen to rise, and the currencies of the emerging markets are still a bit risky, where will we go? The Chinese and the IMF have been floating the idea of a new international reserve currency... but I'm not optimistic. Does anyone know the number of a gold-broker?

For more on the coordination around international reserve currencies see:
McNamara, Kathleen R. 2008. A rivalry in the making? The Euro and international monetary power. International Political Economy 15 (3):439-459.

And for a great intro to these topics, see:
Oatley, Thomas. 2010. International Political Economy (4th Edition) (Paperback). New York: Longman.

Monday, March 8, 2010

A More Multi-Polar Mundo

Two headlines today in the London Financial Times are indicative of a multi-polar world:

Beijing studies severing peg to US dollar

Eurozone eyes IMF-style fund

The first is about China moving away from fixing their currency to the dollar, and allowing it to appreciate. The article also discusses China's growing economic and political ties to Africa and an oil pipeline between China and Russia.

The second is about Europe developing a European Monetary Fund, in contrast to the International Monetary Fund (IMF), whose largest shareholder is the United States. This news comes as the Chiang Mai Initiative moves forward to form a similar monetary fund for Asia.

What does this news mean for the United States?

The bottom line is that moving forward in the 21st century will require a different leadership style than we've had in the past. We will still be the largest economy of any single country - by far - and we'll have the most powerful military for the foreseeable future. But we now share power with real rivals.

Europe as a whole represents more economic might than the United States. Our debt to China means our economy is intimately linked with theirs. And our military might is stretched thin over two conflicts - we wouldn't want to take on any more.

To be more specific about today's headlines:

A strengthening Chinese currency will produce winners and losers in the United States.

The winners:
(1) Exporters. The Chinese will be able to buy more American goods and services.
(2) Import-competitors. Americans will buy more American goods & services, fewer Chinese.

(Aside: the biggest winners are other developing countries who compete for US market share, like Mexico!)

The losers:
American consumers. We'll have to pay more for Chinese goods. That could put a real damper on most Americans' spending patterns.

In the long-run, this is good news for the United States... and for global monetary stability. It will help address our debt to China. But in the short to medium run, we'll be tightening our belts as we adjust.

(Aside: For me personally, it is exciting - a stronger Chinese currency means that more students from China can afford to study abroad here in the United States... And maybe more Chinese Universities will invite me to lecture over there. No, this is not an advertisement - sadly, Blogger is blocked in China.)

The European Monetary Fund is less of a big deal. In the 1950s, 60s, and 70s, European countries borrowed from the IMF and had to accept the conditions attached. With the United States as the largest shareholder of the IMF, this gave our country some influence over policy in Europe. But Europe turned away from the IMF a long time ago. With Greece flirting with the idea of turning to the IMF for a loan, Germany and France are moving to make the divorce more final; Europe will deal with European monetary affairs.

But this European monetary move adds impetus to other regional organizations, like the Chiang Mai Initiative for Asia, and the Banco del Sur for South America. Global governance going forward will be increasingly based along regional lines. The United States will no longer have as much influence - neither directly, nor through its influence at the IMF.

So, the United States needs a new leadership style. We should continue to invest regionally, promoting our relations with neighbors, Canada and Mexico. And we should look to lead the world by engaging multilaterally. The days of effective US unilateralism are over. Cooperation with friends is the key moving forward.

Friday, March 5, 2010

Buy America... Bye America :-(

Congress is flirting with “Buy America” again, “complaining that money is going to projects that are creating jobs in foreign countries.” They’re pointing to the “Buy America” provisions in the 2009 stimulus package, which call for American firms to be favored over foreign firms when making government purchases.

Back in ’09, President Obama correctly observed that favoring US companies over foreign ones could “trigger a trade war” and send a message to the world that “we’re just looking after ourselves.” Indeed, the Buy America provisions have provoked outrage from important trading partners across the globe.

Yet, President Obama’s gentle leadership on this issue is not enough. We need his bold and courageous style to explain in no uncertain terms why protectionism is wrong for the United States.

On March 18, 2008, then-candidate Barack Obama gave the most important speech on race in the United States since Martin Luther King, Jr. spoke in the 1960s. He addressed fears that people have of others who are different from them. He explained that he was running for president because “we cannot solve the challenges of our time unless we solve them together.” The speech showed courage of leadership on a divisive issue, and it inspired many to vote for him.

These days, people are worried about the economy, and it is easy to let fears about people who are different – people of foreign countries – be our scapegoat.

Yet, let’s look back at other periods of stormy economy history. It is widely agreed that the world plunged deeper into the Great Depression of the 1930s because of insular “beggar-thy-neighbor” policies. Governments sought to bail out their own countries at the expense of their neighbors.

Now, as we live through times of economic woe, with crisis in country after country, isolationism is certainly tempting. We are seduced by ugly nationalism to deal with international problems, just as we have so many times faltered and turned to racism domestically. These poisonous fruits, however, can only spell further disaster.

So, while President Obama sometimes nudges in the right direction on this issue, his gentle prodding to tone down nationalist demands are simply insufficient.

We need bold global leadership from someone who understands the ways in which all people – from Kansas to Kenya, from Illinois to Indonesia, from Pennsylvania Avenue to Pakistan – are intimately connected. This is why we elected President Obama.

We need our President to forthrightly explain to the American people exactly why a Buy America approach is wrong:
We live in a globalized, multi-polar world. Simply put, we cannot solve the financial challenges of our time unless we solve them together.

Tuesday, February 16, 2010

When the shoe is on the other foot: Changes in Global Governance

The Chief Economist of the International Monetary Fund (IMF) is calling for countries to raise their inflation targets and pursue counter cyclical fiscal policies. Why? The current economic crisis has "exposed flaws in the precrisis policy framework." As the Financial Times reports, this runs against what has come to be called economic "orthodoxy," and represents a dramatic shift away from the standard policy advice of the IMF - stretching back decades.

During the East Asian Financial Crisis of the late 1990s, for example, the Fund imposed economic austerity on countries that received IMF loans - raised interest rates and contractionary fiscal policy. During the Latin American Debt Crisis of the 1980s, austerity was also the answer. Not surprisingly, these policies resulted in lower economic growth, but the IMF preached financial stability first, economic growth to follow.

Of course, during these years, the only borrowers from the IMF were developing countries. Indeed, until the recent crisis, the last time an advanced industrial country borrowed from the IMF was the mid-1970s. And as Joseph Stiglitz has observed, the contractionary IMF advice seemed somewhat hypocritical, considering the way advanced industrial countries responded to economic crises - far from following economic austerity, these countries always put together stimulus packages.

The hypocrisy did not go unnoticed by people of the developing world, who grew to hate the IMF, some seeing it as a tentacle of Western imperialism. The debacle that resulted from IMF policy advice during the East Asian Financial Crisis was the last straw. Nearly all emerging market countries and even some poorer countries vowed they would never again borrow from the IMF. During the first decade of the 2000s, the IMF had to go on an austerity program of its own. With few countries borrowing or - importantly - repaying their loans with interest, the Fund did not have the funds to run its operations.

Well, now the shoe is on the other foot. The current economic crisis has driven many countries to borrow from the IMF, and the international organization is back in business. For the first time in a long time, however, its customers include advanced industrial economies. And suddenly, economic austerity isn't looking like the answer.

If one takes a broad historical view of the IMF, this softer IMF does not seem so heretical. The IMF was the brainchild of Lord Meynard Keynes of "Keynsian" economics. As the world emerged from the Great Depression, he advocated the international pooling of resources to be used in times of economic downturns in a counter-cyclical manner. The problem as seen by the United States - the world's largest creditor at that time - was that the promise of liquidity during economic crises would lower the incentives of governments to avoid those crises in the first place, a problem we call "moral hazard." The solution that developed over time was "conditionality": in return for liquidity, the IMF would require governments to adjust their policies.

But how much liquidity in return for how much adjustment? This debate has fueled the historical evolution of the IMF. In the early years - up to the 1970s, the United States was on the harsher side of conditionality, with opposition coming from the borrowing Western European countries. When the United States became a deficit country, the advanced industrial world decided to turn away from IMF solutions, pursuing a radically different way to structure their international economic transactions. (Notably, they moved from fixed to floating exchange rates - see Eichengreen's work.)

The IMF had been lending all along to developing countries, however, and thus it simply shifted its focus to them. During these times, the advanced industrial countries usually favored harsh conditionality, while the developing world often complained that IMF policies were hurting economic development. Of course, the IMF decides most things according to majority rule, and votes are supposed to be pegged to economic weight. So, the developing world was out-voted, and austerity carried the day throughout the 1980s and 1990s. Finally, by the early 2000s, practically no one wanted to deal with the IMF conditionality.

Now with the current crisis, the Washington "Consensus" of tight monetary policy and fiscal austerity is no longer. Those favoring weak conditionality and expansionary policies are now carrying the day at the IMF. Yet, there will be a price to be paid for expansion, and when the dust settles, we will have a very different looking IMF.

The emerging markets have arrived. In the coming decade, we will see increasing vote shares at the IMF for countries like China, Brazil, India, Korea, Mexico, Indonesia, Turkey, Iran (yes, a member in good standing) and South Africa - many of whom were historically spurned by IMF conditionality. Still, the debate over conditionality will persist. Those not hit by a crisis will still worry most about moral hazard and advocate stringent conditionality. Those closely tied to the crisis will advocate the massive provision liquidity, eschewing conditionality (see Lipscy's piece on this). Some will preach stability first, growth thereafter. Others will suggest that by priming the pump, we can grow our way out of crisis and debt.

So where's the real change?

Global economic power has shifted. In their Godfather parable, Hulsman & Mitchell suggest the United States is "slipping." We've moved from a uni-polar world to a multi-polar globe. The United States will remain the "chairman of the board," continuing to hold more IMF votes than any other single country - as the world's largest economy and biggest contributor to the IMF. But it will have to share power, most notably with China. And this will be the real, long-lasting change at the IMF. See, during the bi-polar days of the Cold War, the Soviet countries refused membership in the Fund. So the West dominated the votes. But soon, and for the first time in its history, the IMF will have multiple voices with power. Importantly, they will have different ties to different economies - so preferences over liquidity provision and moral hazard may shift depending on where the next crisis hits. Looking decades ahead, we've got to ask ourselves: How will conditionality feel when the shoe is on the other foot?

Friday, February 12, 2010

Dictatorships, torture, and human rights treaties: The Bad Ass Theory

Why do dictatorships enter into human rights treaties?

I addressed this question a while back, picking up on a puzzle first identified by my friend and colleague Oona Hathaway.

Dictatorships that practice the most torture are more likely accede to the UN Convention Against Torture (CAT) than dictatorships that practice less torture. I argued the reason has to do with the logic of torture:
Torture is more likely where power is shared. In one-party or no-party dictatorships, few individuals defect against the regime. Consequently, less torture occurs. But dictatorships are pro-torture regimes; they have little interest in making gestures against torture, such as signing the CAT. There is more torture where power is shared, such as where dictatorships allow multiple political parties. Alternative political points of view are endorsed, but some individuals go too far. More acts of defection against the regime occur, and torture rates are higher. Because political parties exert some power, however, they pressure the regime to make concessions. One small concession is acceding to the CAT.

Peter Rosendorff and James Hollyer, who are from my alma mater - NYU, have a different argument, which I find fascinating. Here's their story:

Dictators who enter into the CAT send a signal of extraordinarily strong resolve to hold on to power. How does the signal work? Well, the CAT has an important legal feature called "Universal Jurisdiction." This means that if a dictator commits torture in his (they's almost universally men) own country, he may be prosecuted for the crime by courts in another country - this is what happend to Pinochet of Chile. Now, as long as the dictator holds on to power, he is safe from prosecution. But if he ever falls from power, he may very well find himself in the same place Pinochet did, when he was extradited from the United Kingdom to Spain.

Skeptics might suggest that none of this really matters since states are unlikely to utilize universal jurisdiction. Yet, as Darren Hawkins and Jay Goodliffe write in an unpublished paper with me, one recent study found that 109 states had incorporated universal jurisdiction into their domestic legislation. Of those, 14 have actually tried court cases based on the principle, and courts have upheld the law in 12 of them.

So, if a dictator enters into the CAT, he better be darn sure that he will never fall from power. And this is precisely the point. He is sending a signal to his domestic audience that he intends on doing whatever is necessary to hold on to power, and he's quite confident in his ability to survive in office. Only the strongest resolve dictators will take such a step. Soft dictators can't rist faking it - if they sign the CAT and lose their grip on power, they're libel to end up in the slammer. So the signal the tough dictators send is unambiguous, and might even serve to quite opposition, who realize that resistance is futile.

The phrase “bad ass” developed when Rosendorff first told me about the paper. I believe I was the first to use the term publicly - first, when I taught the paper to some students, and then more recently at the 3rd Annual Conference on the Political Economy of International Organizations.

I agree with Erik Voeten, regarding “the sheer ingenuity of the theory.” And I’d like to also note that this is part of a broad approach that Rosendorff has developed over the course of his career.

The central thesis in much of Peter’s work is that international arrangements are ways to signal information to an uninformed domestic audience. Basically, rulers and citizens play a principal-agent game of asymmetric information. Whether and what kind of information the ruler will transmit to citizens depends on domestic political institutions (e.g., democracy vs. dictatorship), with rulers always trying to maximize their chances of survival in office. International arrangements can serve as credible 3rd parties that rulers use to transmit information about what type of ruler s/he is.

Peter has used this framework to explain trade agreements in his work with Milner and Mansfield. And he has used the framework to explain transparency (where the World Bank serves a credible 3rd party) in a paper he co-authored with yours truly.

In the trade and transparency work, democracies use international arrangements to credibly signal the fact that they are following policy that is good for voters. In the human rights story, the dictator uses the treaty to signal that they are willing to do anything, including torture, to stay in office - and they’re so sure of themselves, they commit to going to jail (through the enforcement of universal jurisdiction) if they do ever fall from power.

The “bad ass” story of why dictators enter into human rights treaties contrasts nicely with Moravcsik’s story of why democracies enter into them. You see, Rosendorff and Hollyer’s dictators enter because they’re sure they’ll never fall from power, and they want to send a signal of how tough they are. Moravcsik’s democracies enter because they’re not sure at all that they’re going to maintain power… they fear that a tough dictator may want to overthrow and torture them… so they want to tie the hands of the state to a powerful international organization. I don’t think the stories are mutually exclusive, and they pertain to different types of international institutions - the Convention Against Torture has “universal jurisdiction” and the European Convention for the Protection of Human Rights andFundamental Freedoms delegates sovereignty to a powerful international organization…

I’ve been trying to convince Peter to write a book on this stuff… consider this a really rough start :-)

(Credit to Erik Voeten's blog, where I originally posted this comment.)

Thursday, February 11, 2010

Darf ich mich vorstellen?

My name is James Raymond Vreeland, Associate Professor of International Relations at Georgetown University in the Edmund A. Walsh School of Foreign Service and the Government Department.

I love my job! It has taken me all over the world. My research has been presented in over fifteen countries located in six different continents, and I have held positions on five continents at universities including Bond University, ETH Zürich (Swiss Federal Institute of Technology Zürich), Korea University, University of California, Los Angeles, University of São Paulo and Yale University. I also teach for the Global Executive Master of Business program through the McDonough School of Business and ESADE Business School (Barcelona, Spain). My module is taught in Moscow. This summer, I will also teach a course in Buenos Aires for the Master in Development Management and Policy program, a joint degree created by the Universidad Nacional de San Martín (UNSAM) and Georgetown University.

I do research in the field of international political economy. My research explores a wide range of policy outcomes, including economic growth and the distribution of income under programs of economic reform, the foreign policy positions of developing countries, the transparency of policy making under various political systems, and even the commitment of governments to defend basic human rights or, alternatively, to engage in such pernicious activities as the practice of torture. I have also done some work on democracy and its relationship to civil war.

My work addresses the ways in which international and domestic politics interact, in particular the ways in which international organizations can be used to do the dirty work of governments - how they can "launder" dirty politics - how they are used as scapegoats - in short, how international actors can be the "dark knight" in domestic politics (sometimes for better, sometimes for worse).

I have written two books: The IMF and Economic Development (Cambridge University Press, March 2003) and The International Monetary Fund: Politics of Conditional Lending (Routledge, January 2007), and I co-edited Globalization and the Nation State: The Impact of the IMF and the World Bank (Routledge, 2006). I am currently working on a new book entitled The Political Economy of the United Nations Security Council, which is under contract with Cambridge University Press. My research has also appeared in numerous scholarly journals, including International Organization, Journal of Conflict Resolution, European Economic Review, Journal of Development Economics, Public Choice, World Development, International Political Science Review, Political Analysis, The Review of International Organizations, World Economics, and Foreign Policy Magazine.

Thank you for visiting my blog! I will be posting about my ongoing research as well as current events that relate to international political economy. I look forward to your comments...