Monday, February 27, 2012

There Is No Technocracy, Bank of Japan Edition

. Monday, February 27, 2012
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My view (and that of many other market monetarists) is that the Bank of Japan acted as if it didn’t want inflation, tightening policy in 2000 and 2006, despite no inflation. In my view the press and many economists were somewhat naive in accepting the BOJ’s claim that there was little they could do to end deflation. After all, the yen is a floating fiat currency. ... 
I used to wonder why the BOJ tightened so much in late 2006, raising interest rates and reducing the monetary base by 20%. Another Financial Times story gives us the answer: 
In recent years, the bank has tended to shrug off overt political pressure. A 1998 revision of the BoJ law strengthened its operational autonomy by removing the government’s authority to dismiss the governor and deputy chiefs.  
Only under prime ministers with very solid popular support, such as Junichiro Koizumi between 2001 and 2006, has the BoJ appeared to bend to the government’s will. It has put up a particularly strong defence of its independence under Mr Shirakawa, promoted from deputy governor in 2008.
This is a common theme on this blog. Hopefully others are starting to internalize it. For some reason this particular post and discussion reminded me of this old article (pdf) of Oatley's on the politics of central banks. For my money the best articles on the politics of "technocratic" institutions have yet to be written. There's a good bit of fruit still to be harvested from there.

Sunday, February 26, 2012

Conflict Scholars Should Learn Political Economy If They Want to Talk About Political Economy

. Sunday, February 26, 2012
2 comments

First off, apologies for the light posting. A confluence of events have prohibited more activity here. I hope to get going more regularly.

I want to call brief attention to this post from LFC at Howl of Pluto, an excellent and under-appreciated IR/FP blog. Here's the meat:

Maybe Phil [Arena] could consider taking an occasional break from criticizing Reiter and Stam's enthusiasm about democracy and focus on the particular forces that drive bad, suboptimal policy in the particular democracy known as the United States. There are, after all, varieties of democracy, just as there varieties of capitalism. The problem isn't so much democracy per se as the particular form it is taking in the U.S. today.
You don't have to agree with the conclusion to see a problem with the logic. I've consistently followed Phil's postings, and a regular theme is that he is skeptical of claims in the academic literature that "democracy" does this or "democracy" does that. Part of Phil's whole point, as I read him (and I hope/expect that he'll comment on his own at some point) is precisely that "there are varieties of democracy". Moreover, that democracy does not always lead to peaceful, warm, open, transparent outcomes that track to some utilitarian ideal. So when he picks on Reiter and Stam he's doing it from that perspective: a general skepticism of the way that much IR literature talks about democracy, attributes unidirectional causal properties to it, and generally over-idealizes a regime category that -- as LFC notes -- retains plenty of space for all sorts of varying outcomes.

In other words, I imagine Phil would be fine with the bureaucratic-politics-plus-interest-groups story that LFC puts forward, and nothing he wrote contradicts it. (Unlike me, Phil's pretty good about remaining agnostic about things he doesn't possess extensive knowledge about.) The problem is that quite a lot of the IR conflict literature wouldn't be okay with a story where narrow interest groups within a democratic society skew policy in a suboptimal way. Including Reiter and Stam, at least if you give them a literal reading.

Of course, because I'm self-interested, it's easy for me to sum all this up and conclude that the problem is that conflict scholars don't understand political economy.

Friday, February 17, 2012

What Argentina Says About Greece

. Friday, February 17, 2012
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Greg Ip has a nice post at Free Exchange highlighting the similarities between Greece today and Argentina around the turn of the millenium. Well worth reading, as is my post from last October making many of the same points.

Thursday, February 16, 2012

Brinksmanship in Political Economy

. Thursday, February 16, 2012
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Henry Farrell has written a very useful post describing the eurozone crisis in terms of Schelling's conception of brinksmanship as a negotiating ploy. I am in broad agreement with everything he says about the theory of strategic interaction itself, and in particular this part:

There is a fundamental internal contradiction in Kirkegaard’s argument. You can’t simultaneously claim that we are in that happy world where we can effectively disregard the possibility of disaster, and tell us that actors are using brinkmanship to convince Greece that it needs to undertake internal reforms. Either we are in a world where there is a real risk of disaster, which is what allows Germany and northern European states to engage in brinkmanship. Or we are in a world without such a risk, in which case there is no space for brinkmanship. You can’t have your theoretical cake and eat it too.
I'm a big fan of incorporating concepts generally applied to "high politics" -- guns and bombs -- to IPE, and it is easy to conclude that the tactic of brinksmanship may have its uses in situations like these. While I agree with Farrell's take on the theory itself, I'm not sure how well it applies to this particular situation for the reason he lays out: either there is a "real risk of disaster" or there isn't. I don't think there is.

In brinksmanship situations the risk of disaster must be mutual. To stick with Schelling's example -- two men, chained together, dancing ever closer to the edge of a cliff -- the risk must be that both parties will tumble over into oblivion. In a nuclear exchange between the U.S. and U.S.S.R. that was a very real risk; in the E.U. debt negotiations I am not sure that it is. The risk is that Greece tumbles over the cliff, while the rest of Europe watches them fall from above. That is not to say that Greece's collapse would have no adverse consequences for the rest of Europe, but there is nothing close to symmetry: Greece needs Europe much more than Europe needs Greece. If this were not the case, the terms of the proposed bailout -- which, in addition to another round of exceptionally austerity, now includes the virtual abolishment of the democratic process in Greece -- would be nothing like they are.

Throughout this process Greece has had two big plays: default -- which would hurt European creditors, including many banks in northern Europe -- and exit from the eurozone -- which would damage the credibility of the European political project. Both have become less worrisome to northern Europe over time. In the first case, the cost of bailing out Greece now exceeds the cost of bailing out the banks, particular if the ECB continues to make funds available to major European financial institutions. Moreover, European banks have known for a long while now that some form of default was coming, and have (I hope and expect) already made preparations for it. This doesn't mean that a Greek default would be painless, but given the enormous sums of money already committed to Greece and the €200bn now being proposed, shoring up the banks would almost surely require less of a fiscal commitment from other European countries. Moreover, it is more likely that that money will be recouped in full from the banks than from Greece, whose politics are unstable. If done correctly a European "TARP" could even end up breaking even or turning a small profit, as it has in the U.S.

Which brings me to the second potential worry. The exit of Greece from the eurozone would not harm the real economy very much -- Greece's GDP contributes only 2% to the eurozone total -- but could potentially damage the progress of the political union. This is a real concern, but the alternative now appears to be the abolishment of the democratic process in Greece altogether. European leaders are now negotiating with an unelected Greek government, and as a precondition for the release of funds are demanding adherence to the bailout terms from all political parties in the country. Previously they had asked for approval of future Greek budgets. This usurpation of Greek sovereignty, and the derogation of the democratic process within that country, should be as much of an affront to the European political process as the exit of one its least consequential members -- which cooked the books to join the union in the first place and may have never been in compliance with its obligations. Anyway, if a major worry in Europe is the dominance of Germany on the continent, then giving them and their friends such authority over the politics of a member state is not likely to be reassuring.

Another concern has often been expressed: that a Greek default will lead to "contagion". This fear rests on a misunderstanding of what contagion is. If a Greek default led to insolvencies in the banking sectors of other European countries, which then led to the inability of those banks to repay their counterparties in other countries, then this would constitute contagion and might be a real worry. But given the fact that European banks have been preparing for this possibility, given that European governments have already earmarked hundreds of billions of euros for bailout funds, given that the European central bank is finally (sort of) acting like an actual central bank, this should be less of a concern than at any point in the past few years.

The fear that a Greek default will have a negative effect on Portugese bond rates, say, is not about contagion. If investors observe new developments in the European political economy and revise their attitudes towards the riskiness of bonds, that is not contagion. It's simply a rational response to changed circumstances. The European authorities can deal with this in a number of ways, but the most important thing is that no country in Europe is in as desperate of a situation as Greece, or has a real economy in as poor of shape as Greece.

European leaders may believe that Greece -- which now (astoundingly) has a primary budget surplus -- is still capable of generating growth sufficient enough to repay their creditors and remain in the eurozone. If that's the case, then harsh terms on bailout funds are counter-productive. Yet what we observe are the harshest conditions demanded to this point in the process. Given all of the above, it is almost impossible to come to any other conclusion than that European leaders are trying to force Greece out in a way that they can then claim that it was Greece's choice, not theirs.

That is not brinksmanship. That is something else entirely.

UPDATE: See Daniel Davies's "Choose your own adventure" view of the situation, which maps out the difficulties and options nicely and thoroughly.

Thursday, February 9, 2012

Climate Change, Development, and Conflict

. Thursday, February 9, 2012
0 comments

The Journal of Peace Research has a special issue on the security implications of climate change. The issue can be found here, and is open access through the end of February. Over at DoM, Cliff Bob has already posted some (very good) thoughts, and highlights the main takeaway from the issue:

Only limited support for viewing climate change as an important influence on armed conflict. However, framing the climate issue as a security problem could possibly influence the perceptions of the actors and contribute to a self-fulfilling prophecy.
That is one takeaway, but Eric Gartzke makes a much more provocative claim: from the perspective of global security, climate change might actually be a good thing. That is, climate change is a byproduct of increased economic activity, increased economic activity is an indicator of increasing wealth, and increasing wealth is associated with a more stable security environment. Or, as Gartzke puts it:
Ironically, stagnating economic development in middle-income states caused by efforts to combat climate change could actually realize fears of climate-induced warfare.
In a series of posts a few years ago I argued that it was not contradictory to believe that climate change was real and would have a non-negligible impact on the planet, but that we shouldn't do anything to stop it. This is true if you believe the costs of mitigation would be lower than the costs of prevention. There are pretty good reasons to think that is true, particularly in the developing world. Gartzke offers another possible worry along those lines.

Wednesday, February 8, 2012

Winning the Future

. Wednesday, February 8, 2012
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Tuesday, February 7, 2012

The World Is Still Not a Dyad

. Tuesday, February 7, 2012
6 comments

At the risk of redundancy, I'm wading back into the discussion of China's relative power growth vis-a-vis the U.S. that continues to occupy the IR/FP blogosphere. (I covered the last go-round here.)

Michael Beckley comes back at Eric Voeten, arguing that the answer to "Is American power in decline?" depends on how you define "decline". Beckley says that even if the relative per capita income gap between the two countries is narrowing, the absolute gap is widening, a useful point which is often lost in these discussions. Dan Nexon makes the point that Beckley is almost surely defining decline too narrowly, which is true even though Nexon's characterization of Beckley's argument is less generous than it could be.

But, again, all of this is quibbling over issues that, I think, are peripheral. Here's the question we need to answer before we can start really analyzing the roles of China and the U.S. in global politics: What are we referring to when we talk about American decline relative to China? I see two possibile answers:

1. The bilateral relationship: The ability of China to prevail in a conflict against the United States, or vice versa, or for one side to be able to significantly compel the other to take actions that they otherwise would not.

2. The systemic relationship: The ability of China to alter the geopolitical order that the U.S. has been cultivating since the end of WWII, or otherwise thwart the U.S.'s global ambitions, in a way that is different from the past.

It only makes sense to talk in circles about which statistic more accurately captures the relative bilateral gap between the U.S. and China if we're referring to the first of these. Yet I am quite sure that if I polled everyone involved in this discussion and asked them to offer up a subjective probability that the U.S. and China will war against each other in the next three to four decades, every single one of them would assign a probability very close to zero. This is true for several reasons. First, the presence of large nuclear arsenals in both countries which seem to have had, if anything, a pacifying effect on great power interactions since the Cuban missile crisis. Second, the U.S. and China are interdependent economically in large and growing ways, which also decreases the likelihood of conflict. Third, despite sharing many characteristics with previous imperial regimes the United States has no ambitions towards territorial expansion; neither, historically, has China. Neither have given any indication that this is likely to change. Nor is there any threat that a global Communist/anti-capitalist ideological movement, now more inconceivable than at any point since 1848, will re-emerge to challenge U.S. interests. Not even China wants that.

Therefore, it makes little sense to fret much about a traditional Sino-American conflict. Still, one might think that the ability of one side to coerce the other may be changing with the relative distribution of capabilities. This seems unlikely to me as well. The U.S. has been unable to compel China in a meaningful way for decades (if it ever had that ability); this has been obvious since the Korean War ended in a stand-off, and was codified when the mainland took China's seat on the U.N. Security Council in 1971. Similarly, China has not been able to compel the U.S. to take any significant actions that it otherwise would not. If whatever compellence power the U.S. might have been able to exert against China was defunct by the 1950s or 1960s -- despite the enormous disparity in capabilities between the two -- how long would it take for China to gain that ability over the U.S. even if current rates of growth were sustained indefinitely? Many decades, at least, and perhaps never. It would likely take some major technological break-through, or some other unforeseeable system-altering event. That is, it is inconceivable in the literal sense, and would likely require the destruction of the current geopolitical system as presently constituted. Deterrence capabilities have remained more or less unchanged over the past few decades, although the inclination to employ them may have lessened.

So what we're really talking about is the second of the two choices above. If that's the case, then why do we continue to employ monadic, or even dyadic, evidence to try to reach conclusions about a wider system? As should not surprise regular readers, I am skeptical that China's systemic power has increased very much at all over the past few decades. Yes, China is able to block U.N. resolutions that it doesn't like, but that's been true for forty years. Yes, China is expanding its trade and business networks globally, but mostly by going to places where the U.S. has few interests -- Africa and parts of Southeast Asia. While these investments have yielded some fruit, the process has not been seamless. Yes, China is collecting the world's malcontents -- Iran, Venezuela, Cuba, Burma, Sudan, North Korea -- but I'm not sure that's evidence in support of China's growing global clout. More like their desperation for friends of any sort. In any case the U.S. has done fine without close ties to these countries.

China has stockpiled trillions in financial reserves, but seems to have no purpose for them. They haven't been able to use them to buy much influence in the U.S.'s sphere. They haven't been able to employ them on investments that are likely to yield a high return, instead investing in U.S. Treasury bills and GSE securities. Any unwinding of those positions will impair China's growth model, which still depends on a dear dollar, and the erosion of the value of their remaining dollar assets. Those assets, in other words, are more an albatross than an opportunity. And if owning lots dollars makes one powerful, then the country that can create an unlimited supply of them must be very powerful indeed.

What China has not done, and not even attempted to do, is change or overthrow the key components of the post-WWII system: a global U.S. military presence, a series of international institutions, and a set of inter-locking alliance structures that facilitate international integration on security, trade, and finance. In each of these areas China has become more integrated into the existing system over the past few decades, which will make it harder to fundamentally alter that structure in the future. And while they have expressed some interest in marginal changes to the institutional apparatus, they've not pushed for qualitative changes nor have they been able to achieve many of their lesser aims. Nevertheless, China hopes to become more integrated into institutions like the WTO and IMF, not less. China wants more involvement with the other institutions from the G20 to the Basel Committee... this is the U.S.'s playground, and the games played there are played accordingly to the U.S.'s rules. At the same time that China's rise has attracted some countries, it has pushed other countries closer towards the U.S. Arguably the latter -- e.g. India, Japan, Indonesia -- are likely to be more important in the coming decades than those that have moved closer to China, which are mostly a collection of regimes in various states of collapse.

Does China's rise mean that nothing has changed, or will change in the future? Of course not. The rise of Japan and Germany changed some aspects of the international system, as did the waxing and waning of the USSR. It just didn't change the system itself. The question is whether China's rise will be accommodated by the existing system, or whether systemic transformation will take place. If the former is true then the influence of the U.S. is likely to surpass China for the foreseeable future. If the latter is true it may not.

All indications are that the former is true.

If China does continue to integrate into the current system, then that makes the system that much more durable. Which, in turn, further embeds the central position of the U.S. within the system. Which, in turn, could actually increase the power of the U.S. Put another way, the U.S. clearly has more influence over China's trade practices with China in the WTO than it had when China was outside of it.

So it's not about whether GDP growth is a better comparative measure than GDP per capita, or about CINC scores or anything like that. It's about who is better able to influence, control, shape, and mold the global political and economic systems. In order to play game China has had to accept the U.S.'s rules. To the extent that that persists little else matters.

Wednesday, February 1, 2012

Slower Chinese Growth Could Be Good for the Global Economy

. Wednesday, February 1, 2012
0 comments

One thing that we hear a lot is that global economic performance increasingly depends on the BRICSAM countries, particularly China which is now the world's second largest economy. If China's astonishing growth slows, this thinking goes, then they can drag down the rest of the world.

That could be true, but it doesn't have to be. There is a scenario in which slower measured Chinese growth is actually good for the global economy, and also good for the Chinese. I do not refer to beggar-thy-neighbor mercantilism, in which the rest of the world expropriates from China, but to an arrangement that is Pareto-improving in aggregate. To see why we just need to remember our Econ 101 national accounting device:

GDP = C + I + G + (X - M)

See that minus sign in there? If China increases its imports without anything else changing then its measured GDP growth would be negative. Yet this would in no way be a bad thing... everyone agrees that Chinese citizens should be consuming more, some of which should probably be imported goods, and many also argue that the macroeconomic imbalances contributed to by China's large trade surplus increases financial instability. Meanwhile, many countries outside of China would like to increase the exports in order to boost job growth. Narrowing the gap between 'X' and 'M' would be a positive for China and for the rest of the world as well. Some of this might be happening. Chinese consumption has been growing faster than GDP, and imports had been growing faster than exports until last month. A prolonged, multi-year trend of this sort would be good for everyone... and would also show up in the data as a slowdown in Chinese GDP growth.  

A broader point is that we often pretend that GDP measures one thing -- the well-being of a society -- when it's really measuring something different -- the composition of economic activity in a society. Well-being can increase under a variety of scenarios including the increase of imports, which drags down the GDP measure. Or GDP could increase in a way that doesn't benefit society, if e.g. the government spends $100mn building a skyscraper then another $100mn knocking it down. Broad measures like GDP are often useful as proxies for other quantities we're interested in, but not always.

International Political Economy at the University of North Carolina: February 2012
 

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