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?
>>Peitsche!<<

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)

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.

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.

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.

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.

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?

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.)

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...