Coulda Seen This One Coming

Rogoff:

But the problem is not only the numbers; it is one of credibility. Thanks to decades of low investment in statistical capacity, no one trusts the Greek government’s figures. Nor does Greece’s default history inspire confidence.

As demonstrated in my recent book with Carmen Reinhart This Time is Different: Eight Centuries of Financial Folly, Greece has been in default roughly one out of every two years since it first gained independence in the nineteenth century.

It's bad:

Most Greeks are taking whatever action they can to avoid the government’s likely insatiable thirst for higher tax revenues, with wealthy individuals shifting money abroad and ordinary people migrating to the underground economy. Greece’s underground economy, estimated to be as large as 30% of GDP, is already one of Europe’s biggest, and it is growing by the day.

In the case of Argentina, a pair of massive IMF loans in 2000 and 2001 ultimately only delayed the inevitable harsh adjustment, and made the country’s ultimate default even more traumatic. Like Argentina, Greece has a fixed exchange rate, a long history of fiscal deficits, and an even longer history of sovereign defaults. Nevertheless, Greece can avoid an Argentine-style meltdown, but it needs to engage in far more determined adjustment.

One might think that the socialist government would not have the political will to make the necessary adjustments. And they might not. But there is some literature showing that left parties are more able to push through adjustment programs than right parties, precisely because it runs against their ideology: it's a costly signal with a high degree of credibility behind it.

To me the most interesting thing is not the potential for default; as Rogoff says, this is common even in Greece. What interests me is to see the interplay between the Greek government, the EU, and the IMF. The IMF seems ready and willing to jump in, but the EU wants to maintain credibility. At the same time, the EU doesn't want to create moral hazard, so they favor internal adjustment over a bailout, and are pressuring the Greek government to enact those policies. As Edward Hugh says, the EU is acting like a "local 'mini-IMF'" towards Greece after not having done the same with Hungary, Latvia, and Romania.

The roles of supranational and international institutions may be changing in important ways. This is worth keeping an eye on.

Is Greece Too Big to Fail?

We've talked about the dire situation in Greece here before, and now the situation has come to a head: Greece has chosen austerity, much to pleasure of EU officials and displeasure of Greeks, who begun massive strikes. Whenever I hear about a macroeconomic development in the EU, I turn to the indispensable A Fistful of Euros for comment. Edward Hugh doesn't disappoint:

[Public statements from EU officials] have been widely interpreted in the international press as a “no” from Germany and France to any EU bailout of Greece. But is this interpretation justified? Before going further, I think it should be pointed out that the whole argument depends on what you consider a bailout to be. If you take the view that a bailout involves a restructuring of Greek Sovereign Debt, with the EU itself offering to pay a part, then this is clearly not on the cards, at least at this point, and let’s take things a day at a time. But if you consider the “bailout” which is under consideration at the present time to be simply a loan, which in some way shape or form (yet to be determined) would be guaranteed by the EU institutionally, and would thus be available at a cheaper rate of interest than the one the markets are currently charging, then it is hard to see how British or German taxpayers would be having to finance anything, except in the unikely event that Greece were unable to repay.

In other words, the EU is now facing a situation with the sovereign debt of its member states somewhat similar to what the US Treasury and Fed faced with American banks in late 2008: they don't want to fully bail them out and thus exacerbate the moral hazard already in the system, but they also don't want to let them fail and spread contagion throughout the system. Like the US banking "bailouts", there is reason to think that both fates can be avoided by extending credit at attractive rates to cover a short-term liquidity crunch, and that this can be done at limited taxpayer cost (or even potential profit).

But unlike the US Treasury and Fed, the EU seems to be holding out for its pound of flesh: austerity measures, or no funding. Normally this is the purview of the IMF, and that organization is waiting in the wings:

“The IMF stands ready to support Greece in any way we can,” Mr Lipsky said. “It is a matter for the Greek authorities to decide, in collaboration with the European Union, but we are here to help if we are wanted.”

But the ECB seems to want to keep this in-house, perhaps in an attempt to shore up the credibility of the union and forestall the possibility of contagion: if Greece can't get its house in order, then other troubled eurozone economies like the other PIGS (Portugal, Italy, Greece, Spain, to which we can maybe add Ireland) may find their costs of borrowing rise, making it more difficult to service their debts. The ECB is quite rightly concerned about the integrity of the union. The Greek debt crisis may have far-reaching ramifications for European politics.

PIRATES!

Another ship was seized by pirates yesterday, the third of the new year. The hijacking was of a North Korean flagged cargo ship that is owned by a Libyan company and was seized in the Gulf of Aden.

Some cool little stats: Last year "Somali pirates attached 217 ships last year, according to the Piracy Reporting Center of the International Maritime Bureau. There were 47 successful hijackings, with 867 crew members being taken hostage." There are still about 200 hostages being held by pirates off in Somalia.

It Depends on Your Posterior Distribution

Nerdy joke-question of the day comes from Double-D:

If you're doing a PhD in Applied Statistics, specialising in sampling theory, how many times do they make you write your dissertation?

(This was the basis of an actual conversation between me and a colleague, where we were arguing over what I believed to be an entirely sensible generalisation from a single case. He pointed out that he had a degree in statistics and thus could be assumed to have expertise in the area; I countered that he only had a single degree in statistics and would have to take his finals at least 30 times before I could be confident he hadn't passed them by luck).

Probably depends on whether you're a Bayesian or not.

Predicting History

Thomas Friedman's authoritarian streak has been growing for awhile. Still, like Drezner I was surprised that he was unaware of the "Chinese Consensus" until last week. But according to Yang Yao of Peking University Friedman has already missed the curve... the Chinese Consensus is already dead:

But, in fact, over the last 30 years, the Chinese economy has moved unmistakably toward the market doctrines of neoclassical economics, with an emphasis on prudent fiscal policy, economic openness, privatization, market liberalization, and the protection of private property. Beijing has been extremely cautious in maintaining a balanced budget and keeping inflation down. ...

China's astronomic growth has left it in a precarious situation, however. Other developing countries have suffered from the so-called middle-income trap -- a situation that often arises when a country's per-capita GDP reaches the range of $3,000 to $8,000, the economy stops growing, income inequality increases, and social conflicts erupt. China has entered this range, and the warning signs of a trap loom large.

Yang argues that China's only path is democratization. I doubt that, but who knows? Not me, and not Yang either.

Thinking about the Chinese Consensus (which, like all lazy simplifications doesn't actually exist) reminded me of James Fallows' 1993 article "How the World Works" which described another sort of consensus, based on mercantilist writings by long-gone thinkers like Friedrich List. He didn't formally give it a name -- Hamiltonian Consensus? German-Mercantilist Consensus? -- but the implication was that by the early 1990s it had become the akin to the Japanese Consensus: a model replacing the Washington Consensus that could be replicated by other developing economies, especially in Asia. As it turned out, that model had its flaws as well.

The point? Extrapolating long-term trends from short-term data points and isolated cases is a fool's game. To paraphrase the Of Montreal song linked above, history makes us all its b*@%&es. It's not clear whether the "Chinese model" represents a sustainable, replicable model, and anyone who says otherwise is selling something.

No Way Out?

“How long can the world’s biggest borrower remain the world’s biggest power?” Larry Summers

Indeed. The problem, of course, is that it seems that our government can't balance the budget without the benefit of world peace and a dot.com bubble. The Times almost notices this when it writes, "Mr. Obama has published the 10-year numbers in part, it seems, to make the point that the political gridlock of the past few years, in which most Republicans refuse to talk about tax increases and Democrats refuse to talk about cutting entitlement programs, is unsustainable."

I say almost notices this because my current research project indicates that this gridlock is hardly new. The exact same "gridlock" blocked deficit correction in the wake of the Vietnam escalation, in the wake of the Reagan military buildup, and in the wake of the 9/11 military buildup. In each case, everyone wants to reduce the deficit, they just disagree about how. Wilbur Mills blocked Johnson's proposed tax increase for a year in order to force Johnson to accept cuts in Great Society programs. And how soon we forget the congressional war of attrition that brought us Gramm-Rudman-Hollings. Nothing really new about the current gridlock.

What is new is the scale. In past episodes, inability to correct a deficit sparked a financial crisis and the crisis broke the political deadlock. In this episode, the magnitude of the financial crisis has prompted a political response that increased the deficit. Probably warranted. However, we are stuck now with a system incapable of corrective action and a deficit of rather unprecedented proportions. How big a crisis will it take to shake us lose from this equilibrium? And how much power do we lose as a consequence?

What Does Unsustainable Mean?

These sentences hurt my head:

"By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years."

Doesn't this mean that American deficits will remain at unsustainable levels for at least 10 years?How can unsustainable deficits persist for 10 or more years?

And then after remaining at unsustainable levels for 10 years, deficits "start rising again sharply" in 2019-2020.

Which I guess means that the deficits will be unsustainably small, and so naturally after 10 years they get bigger.

There Is No Resource Curse

So says Adam Martin, guest-blogging at Aid Watch:

New research argues that empirical work on the Curse suffers from two interrelated problems. First, it uses dependence (the share of GDP from that resource) and calls it abundance (the stock of a resource in the ground). But dependence in turn depends on institutional quality—if you have sound institutions, natural resources take their place along other industries. If not, natural resources will by default constitute a large share of GDP because poor institutions stifle an advanced division of labor. When you look at cross-sectional data using dependence as a proxy for abundance, it will look like natural resources compromise institutional quality.

That reliance on cross-sectional data is the second major problem. The Curse story does not claim that Nigeria is Britain plus oil, but rather that Nigeria is less democratic than Nigeria would be in the absence of oil. One way to get around this problem is to test whether oil makes country X less democratic using panel data with fixed country effects. That’s fancy econometric speak for taking into account other factors that might make country X more or less democratic—its history, institutions, culture, etc. Fixed effects also allow testing a corollary of the Curse known as the “First Law of Petropolitics”: as oil prices go up, oil-rich autocrats crack down on democracy even more.

Martin highlights, and links to, some of that new research at the link.

There are still fundamental questions at play: if poor institutions are to blame (as alleged by some of that new research and much old research too), that still doesn't tell us why some places have poorer institutional development than others. IR theory offers a few potential explanations:

1. Structural factors make conflict more likely in some places than others. Sometimes this leads to actual conflict, other times the potential for conflict retards the development of a more institutionalized, liberal social order that can encourage more division of labor. Either way, the kinds of institutions that can facilitate development never take root, so development is perpetually stunted.

2. The notion of dependence immediately raises the specter of "dependency theory," according to which LDCs become dependent on their natural resources. Not on the resources themselves, but rather on the technology needed to procure and commoditize those resources. This technology comes from richer states, in whose interests it is to keep LDCs in a downtrodden state and thus keep profiting from them. So LDCs cannot improve their status by participating in the global economy until they are somewhat self-sufficient. These theories were much in vogue in the mid-20th century, but fell out of favor following the rapid development of export-biased economies in Asia and elsewhere and the continued stagnation of isolated economies.

3. Good, old-fashioned, power politics. Those who have it tend to keep it by taking control of lucrative industries, using the proceeds to enrich and insulate themselves from political competition.

Emmanuel recently discussed some of these issues in the context of Nigeria. My take? There is still a lot of work to be done in understanding institutional development and if/how the international community can encourage it.

Courage

Fifty Years Ago Today.

Ice, Ice, Baby (or a Lesson in Bureaucracy)

Ice T lyrics

Music Video - Vanilla Ice - Ice Ice Baby Video - Ice T Music Videos

Music Videos by VideoCure

(Go ahead, push play. You know you want to)

UNC suspended classes until 10:00 a.m. this morning. This not only makes no sense, it actually has the opposite of its intended effect. The reason to cancel Monday morning classes following a Saturday morning snow is to minimize employee and student travel on hazardous roads. This is smart, because here in the Triangle city crews are incapable of managing to clear roads after a frozen precipitation event. This may be a function of equipment shortages (why spend a lot of money preparing for rare events) or lack of knowledge. As a consequence, every time we have some event, roads remain treacherous for a number of days. So, the University (and local schools) suspend classes so that we aren't traveling in dangerous conditions.

However, cancelling class until 10:00 actually exposes students and employees to more treacherous road conditions. Nothing magical occurs between 7:00 and 9:30 (the time I would have to get in my car to make a 10:00 class) to make the ice disappear from roads. The sun rises and we see a little bit of melting. Moreover, as anyone accustomed to driving or walking in winter conditions knows from experience, ice covered by 1/16th of an inch of melted ice (i.e., water) is actually more treacherous than black ice. And it turns out that science actually supports individual experience. By cancelling classes until 10:00, therefore, the University unintentionally encourages students and employees to travel in conditions that are more dangerous than those they are trying to protect us from.

This is why I hate bureaucracy. It makes us stop thinking. Oh, and this is why I cancelled my 11:00 a.m. class.