The opening session today in the ongoing OECD Forum 2010 was on the future of capitalism, where economic historian Anatole Kaletsky argued that “we’re entering a new period of pragmatism, when ideology will give way to a more “common sense” approach.” Arguably, this is not such a radical notion; the financial crisis has shown in a dramatic way that there have been some serious cracks in what has commonly been accepted as “good” economic policy. It is easy to blame greed and carelessness in the financial sector, but that hardly goes to the heart of the problem. At the end of the day, even if the greed and carelessness of a few “evil bankers” really is to blame, policy has to change if the economic structures have been conducive to making it cause despair for millions of people.
Aside from highlighting dysfunctional economic structures and the need for reform, a very immediate consequence of the crisis is that Governments have been [Read more →]
May 28, 2010 1 Comment
King Solomon -the wise and rich by Giovanni Demin (1789-1859)
For the past 8 years Dani Kaufman has been publishing his Governance Matters papers in which assessment of the level of governance in countries across the world is performed. Last year he followed up with pointing out a group of 8 (ggg-8) which apparently could teach other countries around the world how governance should be done. When the financial crisis struck Dani Rodrik used the opportunity to attack Kaufmann, who he finds, puts too much weight on governance when it comes to economic growth:
“After all, no-one can deny that the United States, for all its financial follies, is a rich country. It turns out that it is possible to be corrupt in a fundamental way and still be rich. My own view is that there was never a strong theoretical or empirical argument for relying on governance reform, as conventionally understood, as an engine of higher growth. The case for governance reform is that it is a good thing to do in and of itself. But don’t confuse it for a growth strategy.”
For Rodrik, who has also recently come out as a skeptic to democracy’s effectiveness in promoting growth, the active measures and policies a government implements is more important, more resembling industrial policy. In response to Rodrik the Governance Matters blog of the World Bank say that
“It is true though that the debate about the causal relation between governance and growth is open and far from reaching final conclusions -and even when evidence suggests its existence, the transmission mechanisms from good governance to growth remain unclear. This makes more relevant the analysis and diagnosis of what aspects of governance matter the most for growth -under local and more specific circumstances. There is an agreement that the times of cookie-cutter approaches for the governance reform agenda are over. Instead, a country-oriented approach provides the best chances to effectively link the governance reform agenda to a country’s growth strategy.”
At least one agrees that governance must be looked and evaluated at at an aggregate, national level, but there are major flaws with the way Kaufmann tries to measure governance and its effects. By subjectively setting a standard for what ‘good governance’ encompasses, one assumes that what is good governance for one country would also constitute good governance for another. This is clearly wrong. Even though Norway scores close to top on the list on most measures, adopting Norwegian style institutions would not necessarily work very well in most other countries.
For good governance, I would argue, there is no gold standard, every country has to design its system to fit its context. Moreover, one needs to take history into account and basing a governance system on what is already there. Rather than searching for Platonic ideals we should seek effective governance systems that work – very much in line with the Neo-Schumpeterian or Evolutionary approach.
Lastly, governance should be evaluated in terms of effect or result and not process. I would say China constitutes excellent governance, how would it be possible to achieve above 10 percent growth almost every year for the last 30 years if not? This is not to argue China is an ideal democracy or that it is treating all of it citizens very fairly, but in terms of improving the life’s of its citizens it has been truly successful. By evaluating policies on the basis on results we also ensure that the debate becomes a lot less biased and ideological.
May 28, 2010 No Comments
The port of Shanghai from WikiCommons
Dani Rodrik recently had a commentary where he argued that industrial policy is returning to the main stage. Within the Tallinn School (i.e. the economic research associated with the Technology Governance program in Tallinn) active government policies are seen as essential in order to create the ‘virtuous circles’ of high value-added economic activities. Rodrik (not associated with Tallinn), argues that industrial policy is (i) “a state of mind rather than a list of specific policies” (ii) “relies on both carrots and sticks” and (iii) “industrial policy’s practitioners need to bear in mind that it aims to serve society at large” As Erik Reinert has shown, history abounds with examples of how almost every successful economy has at some point employed some kind of industrial policy. Skeptics usually reply, yes, but what about all the failures? By no means is industrial policy always effective and how well it works in a specific case depends on an inordinate amount of variables. Importantly, it is “a state of mind” and one must experiment to see what works. I would rather ask: what is the alternative, if industrial policy is the only way we know to have worked? Recently, the World Bank has come off as a bit more positive towards industrial policy, but their understanding is quite narrow:
“If industrial policy is nothing more than government agencies organizing conferences with private sector players, I’m all for it. If we include in the definition of industrial policy the supply of classic public goods like infrastructure and education in coordination with the needs of the private sector, I am still fully in support. However, I tend to part ways when the state gets involved to the point of picking winners, which must inevitably be the case when more heavy-handed interventions are put on the table. ” from the World Bank Private Sector Development Blog.
Industrial policy is more than supplying basic infrastructure, but still it is not about picking winners. One aims to develop specific sectors of the economy, calculating that the spillover effects will benefit the economy as a whole. The Asian economies, of India and China, but also Brazil are recent examples of how industrial policy has been implemented successfully. But Chris Blattman points to an interesting example of how it has been carried out for shoe manufacturing in Ethiopia.
From my experience, how one looks at industrial policy depends a lot on one’s view of economics: In the first post here at Evolution-Revolution, we argued that “understanding the dynamics that propel the economy into the unknown should be at the core of economics, rather than optimizing a static economy that only exists in the abstract.” As such if one believes the most efficient allocation of today’s resources is essential one quite naturally comes to the conclusion that any form of intervention is inefficient. By incorporating the dimension of time however, one can more easily conclude that its worth sacrificing a little efficiency today for what might be a much more prosperous tomorrow.
May 27, 2010 1 Comment
According to the Washington consensus, open international capital flows were essential to developing countries in order to achieve cheap financing and efficient allocation of resources. In particular, the IMF and the World Bank were stalwart defenders of floating the exchange rate and letting the market forces determine the inflows and outflows of capital of a country.
Classical development economists, such as the Estonian Ragnar Nurkse, pointed out the fragility of relying on external financing as early as 1944 and paradoxically laid the basis for the founding of the Bretton Woods institutions (IMF and World Bank). With Bretton Woods came the managed flow of international capital, but which collapsed in 1968 and led to subsequent liberalization. In receiving aid and loans from the World Bank and IMF, developing countries were pressured to liberalize and open their economies to foreign investors.
After the Asian crisis of 1997, more attention was paid to fragility that arises when foreign investors withdraw capital and local currencies collapse. The problem is especially acute when locals have taken up loans denominated in foreign currencies, thus the depreciation causes their debts to sky-rocket. But it is first recently that mainstream economists have argued for letting developing countries control the capital inflows.
I find it very warming that both the IMF and World Bank seem to have changed tack, and returned to their more Nurksean / Keynesian roots. In this very interesting blogpost, Jamus Lim of the World Bank presents data that out of 189 major capital account liberalizations since 1970, at least 154 have led to a severe financial crisis! He concludes by quoting a recent IMF staff paper.
“Finally, the the selective use (PDF) of capital controls in a broad policy mix may be useful in helping moderate surges in portfolio inflows, especially when they are directed toward debt rather than equity. “
Striking words when coming from Washington indeed. More depressingly though, Estonia seems to have forgotten the lessons from its premier economist.
May 27, 2010 1 Comment
Something is definitively going on in the world of development economics. On top of a poor growth record in the countries where the then dominating “Washington Consensus” was deployed in full force during the 1990’s and 2000’s, the global financial crisis has made revisionism cool and brought about a wonderful flowering of all kinds of interesting intellectual changes.
I was particularly struck, today, by one of the latests post on the World Bank blog, linking to a paper with the same title:
The post and the paper are not, as you might think, written by Erik Reinert, but by a World Bank economist by the name of Salomon Samen. It discusses, amongst other things, the importance and relevance of classical development economists such as Raul Prebish and Hans Wolfgang Singer:
Based on the Presbish-Singer hypothesis, free trade and its corollary specialization were to confine developing countries in the production of primary products which are subject to short and long term detrimental effects for developing countries. Hence, in order to stabilize export earnings, boost income growth, and upgrade value added, developing countries had to increase the variety of their export basket. In the light of the dismal economic performance of many developing countries that implemented trade restrictive protectionist policies in the 1960s, and 1970s, many policy makers have, since the 1980s, been seeking to expand their exports and have increasingly been recommending development strategies based on outward orientation including reduction of trade barriers and opening of international trade to foreign competition. Because export supply responses following first generations of outward oriented trade policy reforms have been mixed, expanding and diversifying exports remains a major concern for policy makers in many countries.
It will be interesting to see how long parts of “heterodox economics” will remain heterodox.
May 27, 2010 1 Comment
Holocaust surviver and psychologists Viktor Frankl delivers an amazing speech on searching for meaning and thinking the best of people. And as Goethe agrees with him, it must be true.
If you haven’t read his memorial from Auschwitz, Man’s Search for Meaning, you should
May 19, 2010 1 Comment
In their Questions of the Week column, Foreign Policy claims that Britain’s newly elected David Cameron and Nick Clegg are the Doublemint Twins. Me and The Sundance Kid are offended. We are the real Doublemint Twins. There is no way Nick and Dave are anywhere near as suave as us, nor as good at making nice sketches of sandy blond passersby.
May 16, 2010 1 Comment
Here are some enlightening quotes we found on the internet:
If the Fed, especially under Greenspan, was always the loving Mommy, the Bundesbank was the harsh Prussian Vater, prepared to let its kids die if they thought it was good for them.
Anybody who has ever taken a meeting knows that trying to hold the attention of people with BlackBerrys is like trying to teach Latin to delinquent teenagers.
Financial Times, which named Blankfein as its “2009 Person of the Year,” stated: “His bank has stuck to its strengths, unashamedly taken advantage of the low interest rates and diminished competition resulting from the crisis to make big trading profits.” Critics of Goldman Sachs and Wall Street have taken issue with those practices.
and finally do think beyond, do some Kaupthinking:
thanks to Ultima Barbarorum for sharing this one and also offering some excellent comments.
May 13, 2010 No Comments
“Betting Against Home Owners” is Betting For Affordable Housing – A case for Goldman Sachs doing “God’s work”
In the still ongoing political smear campaign against Goldman Sachs conducted by the Senate Subcommittee on Investigations, the latter has been particularly enraged by Goldman Sachs’ supposed “bet against home owners”. That is, because Goldman Sachs was net short exposure to mortgage-related securities, policy-makers have been arguing that the bank was contributing to pushing prices down, and in an evil way benefiting from the ruin of hard-working regular Americans.
Now, first of all, I am unsure about whether Goldman’s supposed “big short” really had a significant impact on housing prices. Arguably, the collapse of the U.S. housing market in 2007-2008 was a necessary consequence of unsustainably rapid price increases brought about by horribly easy credit in the years before, and would have been just as painful for regular hard-working Americans regardless of whether Goldman had a net short position or not. One could perhaps even argue that the crash would have been worse if Goldman had not been as hedged as they were.
Above: Charles Ponzi, the model banker, according to the Senate Subcommittee on Investigations
Nevertheless, it is interesting for the sake of argument to assume that Goldman’s supposed “big short” did in fact push down the price of property, which seems [Read more →]
May 9, 2010 7 Comments
The Norwegian Government Pension Fund, managed by Norwegian Bank Investment Management (NBIM) sold off more than half of it’s 133 billion kroner position in Greek, Portugese, and Spanish government bonds during 2009. The funds chief executive, Yngve Slyngstad, explained that while Eurozone government bonds in 2008 were priced as if they gave risk-free returns, “we said they were more like return-free risks”. Well done, Nassim Taleb would have been proud – there are arguably no such things as risk-free returns anyway (at least not in Southern Europe).
Yngve Slyngstad, not yet fifty years old, started his career as a junior researcher at Norges Bank at the age of 31 after completing a whopping four Master’s degrees in Law (University of Oslo), Economics (UC Santa Barbara), Business Administration (NHH) and Political Science (University of Paris, Sorbonne), spending years backpacking around Asia, and living by himself in the wild and weather-torn Northern Norway reading Wittgenstein. Needless to say, we here at Evolution-Revolution think this is a pretty awesome guy.
May 7, 2010 2 Comments