The Arab Spring and the Global Economy, or, The Geopolitics of NGDP Targeting

Matt Yglesias has a post on the difficulties with getting Egypt's economy going post-revolution:

To give a broad overview of Egypt's problems, the countries of the developing world are now falling into roughly three groups. First, you have India and China who are driving global economic growth and whose rising middle classes and need for production inputs are increasing global demand for all kinds of primary commodities. Second, you have countries -- including much of Africa and Latin America -- who are growing rapidly by exporting primary commodities at new higher prices. Third, you have countries that aren't commodity exporters and that are growing slower than China/India so average people's incomes can't keep up with rising commodity prices. ...

The self-sufficiency stuff indicates that Freedom and Justice has correctly identified Egypt's main problem as increasingly unfavorable terms of trade in a resource-constrained world. But is self-sufficiency a realistic strategy? It might be if Egypt's food gap is caused by decades of corrupt mismanagement leading to devastatingly low agricultural yields. But on a per hectare basis, Egypt's cereal farming is already extraordinarily productive.

Egypt's problem, obviously, is that the country is mostly a giant desert. Giant desert + long narrow strip of incredibly fertile land = cradle of civilization, but it's not a great long-term growth strategy.

This reminded me to write a post that I've been intending to put down for awhile, and that concerns the dilemma facing small open economies that import a lot of basic necessities. Put simply, it runs like this: there remains no viable development model that does not involve somewhat-open engagement with the global economy. This is a new phenomenon in global economic history. In prior periods you could expand growth by expanding your empire. Post-WWII, overt imperialism of the sort that dominated geopolitics before became impossible. Developing countries, many of which were former colonies, believed that their terms of trade were disadvantageous from the perspective of development, so they tried policies that protected local producers from the global market. This generally failed pretty much everywhere it was tried, and the countries that shifted from import-substituting industrialization towards export-led industrialization performed very well in the last half of the twentieth century.

But these countries generally had political systems that rewarded development. Many of them were democratic, or if they were autocratic the rulers were at least dedicated to development and felt that their political futures were tied to increased economic growth. Kleptocratic autocracies, on the other hand, actually had incentives to not develop. Instead, political survival was dependent on maintaining elite support, which was more easily done by distributing rents. So these countries didn't develop, and their terms of trade didn't improve, even if their economies were relatively open.

What happens when you are a small open economy? You are susceptible to movements in global asset prices. What drives global asset prices? A number of things, but one of them is movements in the global monetary system. What institution has the greatest effect on movements in the global monetary system? The U.S. Federal Reserve. So if you are a small open economy, what the Fed does has an impact on your real standards of living. What has the Fed been doing?

Here's a timeline of Fed actions during the crisis. That fist tick up is related to the Fed's first round of quantitative easing, which began in January, 2009. The second round of quantitative easing was announced on November 3, 2010, but had been expected for some time (from at least October 1, when NY Fed President Dudley called for QE2). Commodity prices spiked again, and the Arab Spring began literally a few months after.

In other words, there's a fairly strong case to be made that nominal GDP (NGDP) targeting -- backed by large purchases of financial assets by the Fed -- of the sort favored by Scott Sumner and other "market monetarists" (or whatever they're being called) has the potential to export instability to the rest of the world. This isn't just economic instability; it can lead to political instability. In Libya, it could have led to mass slaughter or even genocide and eventually necessitated U.S./NATO military intervention. Thinking in these terms offers a different perspective than other accounts of the role of the Fed, but also of the revolutions in the Middle East and North Africa. Here are just a few important potential implications:

1. This can help us explain why the Arab Spring happened when it did. Mubarak, Ghadafi, and other Arab autocrats had been in power for decades... why did the revolutions all happen at the same time?  Why now? Many have focused on path dependence and contagion effects, but there's another answer: there was a huge external shock to their political economies, which originated with Fed actions.

2. This should give us some pause when advocating for policies that will boost U.S. demand in the short run. The out-sized influence of the U.S. on the global economy, particularly in the realm of the monetary system, means that any decision we make will have far-reaching ripple effects. We could find ourselves in an environment where the political dynamics in the U.S. provide incentives for policymakers to goose the U.S. economy, which then in turn sends other parts of the world reeling. The Federal Reserve should keep this in mind, as should pundits and others who call for rapid extreme easing until NGDP growth returns to trend. To a large extent, the U.S. Fed controls the global monetary system, particularly for small, open, developing, resource-dependent economies. It can use that power for good or ill. It needs to be aware of the effects of its actions.

3. Academics and pundits must stop thinking in a closed-economy context when we live in an open-economy world. We can't only consider the impact of policy choices within the U.S., since what happens in the U.S. drives what happens everywhere else.

(Note: I was first made away of this line of thinking by another IPE scholar, who has been working on a more rigorous analysis. If I hear any more about that I'll pass it along.)

Trouble in Egypt

Or is this "UNC Everywhere"? Poli-sci professor Andy Reynolds is not optimistic about Egypt's coming election:

“This is the most opaque process we’ve seen,” said Andrew Reynolds, an associate professor of political science at the University of North Carolina at Chapel Hill who studies and advises on electoral systems in new democracies. “No one, not the political parties, the United Nations” or non-governmental organizations “knows who’s even writing the law,” he said. ...

The bottom line is that this system advantages the old parties,” he said. “The people who are going to lose out are the Tahrir Square groups and the liberal movements.”

The rest of the article is also good. The consensus (from the article) seems to be that the election should be postponed to give time for groups/parties to organize properly and for mechanical electoral institutions (rules, monitors, logistics) to be constructed, but the article cites a poll in which 75% of the population think the elections should go ahead as scheduled. This certainly bears watching. I'm not especially optimistic.

(ht: Layna)

UNC Everywhere

UNC Poli Sci Prof Graeme Robertson has a nice article in FP on the politics of dictatorship and revolutions. I have a few minor quibbles, but in general it's very good (and he knows much more about this than me, so my quibbles are likely wrong). Those interested in the Mideast revolutions, or the politics of authoritarianism, will likely learn a thing or two from it. For more depth, see his recent book (but maybe wait for the cheaper paperback release).

Hegemony and the Middle East

John Quiggin has continued his IR/foreign policy commentary, and I continue to generally disagree with his take, but I think I can finally pinpoint why. Take this:

The approach taken by the Administration [in Yemen] has been broadly consistent with that adopted in relation to Mubarak in Egypt. The Administration initially supported Mubarak’s proposal to stay in power and implement reforms, then shifted to the idea of replacing Mubarak with someone like … who could be trusted to pursue the same policies. When that became untenable, the Administration supported a transitional military government with elections to follow, and this outcome looks sustainable at present. [Maybe not. -wkw] However, there’s no guarantee that the government produced by elections will be as pliable as Mubarak’s, particularly in relation to Israel.

These developments don’t fit well with claims about continued US hegemony, at least if hegemony is supposed to entail a capacity to control outcomes. Obviously, the US is not a negligible player, and its change of side will probably hasten Saleh’s departure. On the other hand, the US changed sides only when it became clear it would be on the losing side otherwise. So, its position might affect the timing and consequences of Saleh’s fall, but it wasn’t decisive in bringing it about.

Given the content of this post, as well as previous entries, Quiggin seems to equate hegemony with something approaching omnipotence. E.g., the U.S. is no longer a hegemon because it can't pacify Iraq, or can't drive Airbus out of the market, or reacts to world developments rather than charting its own course and forcing everyone else to go along without a fuss.

The problem with this is that Quiggin has continuously phrased his argument as "U.S. decline has already occurred" or "U.S. is now just another state" or "U.S. has lost its hegemony". He believes that the U.S. used to be a hegemon, but now is not. But I can't think of the period in which the U.S. had unlimited capacity to do whatever it wanted without regard for anyone else. The types of examples he's given as evidence of the limits of current U.S. power -- trouble controlling local populations, regional satellite governments refusing to do D.C.'s every bidding, U.S. corporations facing strong competition globally -- have fairly clear analogues throughout post-WWII history. The U.S. had trouble pacifying Korea and Vietnam, couldn't keep the lid on Iran, was never able to cast aside Castro. Several of the U.S.'s major industries in the 1950s -- such as United Fruit -- lost dominance by the 1970s. The major industries of the 1960s -- the rust belt industries -- lost market share by the 1980s. So when was this time when the U.S. got everything it wanted, just how it liked it?

I think Quiggin may be overestimating just what "hegemony" really implies. It is not absolute power. Some theorists of hegemony refer to a "preponderence of power" that is exercised (largely) through indirect means (to distinguish from empire). Kindleberger referred to a hegemon's ability to stabilize the international system, not dominate it. In any case, it is a continuous rather than dichotomous measure. Quiggin has argued that hegemony, in the American case, requires authoritarianism in the periphery as a means of control. This is the very nearly the opposite of what most recent theorists of hegemony contend. Instead, the "American order" is predicated on the diffusion of liberal norms -- broadly defined, but generally including relatively open, but mixed, economies and representative governments -- throughout the international system, buttressed by a collection of multilateral institutions and a strong U.S. military with a global reach.* In other words, it's a hegemony of consensus rather than brute force, but force can be used if the consensus breaks down.** To the extent that this consensus-based system reinforces the values that the United States prefers, it isn't pushing things too far to attribute its persistence to U.S. hegemony. Indeed, much of what the U.S. wanted (and got) since WWII is not directly unobservable. I.e., the U.S. rehabilitated Japan and Germany and re-integrated them into the international system without much controversy. There have been no major power wars since 1945, and before you say "that's because of nuke deterrence" remember who it was that was doing the deterring. As always, counterfactuals are hard, but mainstream IR theorists from most ideological traditions tend to agree that the U.S. has had a stabilizing influence on the international system. Therefore, if you go with Kindleberger's definition -- hegemon as stabilizer -- rather than Quiggin's -- hegemon as dominator -- you end up with different interpretations of both the motivations and results of the U.S.'s behavior.

Of course there have been moments where the U.S. has had to choose between values: either open markets, or representative government. In many of the cases, i.e. where it has had no large interests, the U.S. has not directly intervened. In other cases, particularly at the height of the Cold War, it's chosen markets over democracy. The type of action that the U.S. has taken to reinforce open markets has ranged from force intervention (the removal of Mossaddegh in favor of Pahlavi, and Allende for Pinochet) to diplomacy (China) depending on the situation. Since the 1980s there's been something of a reversal: the U.S. has preferred accommodation to force when promoting market openness, and has used force to push political reform. Interventions into Somalia, the Balkans, and Afghanistan were clearly not for material reasons, and I think the case that the Iraq invasion was motivated primarily by economic interests is remarkably weak. This shift, I'd argue, is a response to the collapse of the Soviet alternative, which effectively removed the primary rationale for realpolitik in the promotion of American economic values, which left the liberal political values as what needed spreading.

Quiggin hones in on what may be the exception: the Middle East and N. Africa. It's true that American policy there is closer to its Cold War pattern of supporting authoritarians so long as they're willing to keep markets open and not exacerbate security dilemmas. For example, American policy towards Egypt has long been conditioned by Suez Canal politics, as well as Egypt's stance towards Israel. But there has been another component for at least a few decades: try to use American support as a moderating influence on regimes. In Libya, that meant buying off Gaddafi's nuclear program. In Pakistan, that's meant trying to prevent a full-on military/ISI takeover, and dismantling AQ Khan's proliferation network. In numerous countries it's meant limiting belligerence directed at Israel. We might question how successful all of these have been, but in each case there's both a logic to the U.S.'s behavior and most likely some tangible gains from them.

Which leads me to Quiggin's conclusion:

Now let’s do what game theorists call backward induction. The crisis in the Arab world has shown that, when push comes to shove in the form of a popular revolt, the US state will have no choice but to leave friendly dictators to their fate. But, if that’s the case then a rationally self-interested US state would not commit significant (military, financial or political-credibility) resources to backing those dictators in the first place, since the benefits are likely to prove transitory. So, even if the current wave of revolts peter out leaving some of the autocracies in place, it would make good sense for the US state to disengage from them.

This only works if Quiggin is correct that the maintenance of authoritarian regimes is the ultimate U.S. goal. But, as should be clear, I see no reason to think that's the case. It seems to me that the U.S.'s $2bn/year or so of aid to Egypt was worth it, as it lessened security dilemmas between Israel and Egypt and gave the U.S. some leverage over the Egyptian military when it was not clear whether they'd support Mubarak or the protestors.*** Similarly, U.S. aid to Libya convinced Gaddafi to abandon his nuclear program; can you imagine the situation there now if Gaddafi had been able to weaponize nuclear material? Saudi Arabia has similarly learned to live with Israel because it gets rich off of the U.S. In other words, there are a range of intermediate interests besides "preserve authoritarianism" that might make U.S. engagement with authoritarian regimes rational. That does not mean that the U.S. prefers those regimes in all cases (although it might in some); instead it means that hegemony always comes with constraints, so some interests are given priority over others.

*Once again, I'd refer Quiggin to Ikenberry's After Victory.

**There's a long line of thought related to this -- from Gramsci to McCloskey outside of IR, and including Ruggie and Gilpin and many others within IR -- and Quiggin himself seems to endorse a variant of it in his "Fukuyama, F*** Yeah!" post.

***How much leverage is not clear. I suspect we'll learn much more about this in the coming years. But surely the answer is "more than Obama would've had if the military didn't rely on the U.S. government for ~ 25% of its funding".

QOTD

From Nir Rosen, via Tom Ricks:

This is not about Islamism; this is about regional alliances. Whether it's the Muslim Brothers or the Communist Party of Egypt who takes over after Mubarak, we can be certain that the new regime will be less of a puppet and less part of the American, Saudi, and Israeli alliance in the Middle East than Mubarak was. This is what the Saudis fear, that the architecture they have carefully crafted with the Americans is crumbling -- with Iraq ruled by the hated Shiites, Fatah in Palestine a joke, Iran ascendant, the Saudi proxies in Lebanon a failure. This has nothing to do with Islamism.

Checking in with Vaclav Havel

Clintonian, in a way?

Almost immediately [after leaving the Czech presidency] he started setting up an ex-presidential office, something perfectly customary in the United States but largely unprecedented in Central Europe. It was not his style to go on the lucrative speaker circuit (he may be an exceptionally gifted speechwriter but he’s a middling speaker) or to leverage his celebrity in the world of business. He has also largely avoided commenting on public affairs back home. Rather, he has continued in what he was doing for most of his adult life—advocating human rights causes and supporting dissidents around the world—in Cuba, Belarus, Burma, North Korea.

In keeping with his holistic view of the world as a network of cultures, ideologies, and religions, Havel designed and developed a forum where all these strands of modern civilization can meet and debate. The Forum 2000 conference was first held in Prague in 1997 and was intended to be a one-off. But instead it took off. In October, the fourteenth Forum 2000 conference, attended by politicians, experts, journalists, philosophers, and religious figures, took place under the title “The World We Want to Live In.” ...

The model of American presidencies does not stop at offices and philanthropy but extends to a Havel Presidential Library, the only institution of its kind in Europe. It collects, archives, and presents all the available documents pertaining to Havel and his presidency.

Now he's directing his first movie. More here. Havel's words of advice for political dissidents living under oppression, as he was in 1978 when he wrote them, was to live as if you were free:

Is the basicjob of the "dissident" movements is to serve truth, that is, to serve the real aims of life, and if that necessarily develops into a defense of individuals and their right to a free and truthful life (that is, a defense of human rights and a struggle to see the laws respected), then another stage of this approach, perhaps the most mature stage so far, is what Václav Benda called the development of "parallel structures."

When those who have decided to live within the truth have been denied any direct influence on the existing social structures, not to mention the opportunity to participate in them, and when these people begin to create what I have called the independent life of society, this independent life begins, of itself, to become structured in a certain way. Sometimes there are only very embryonic indications of this process of structuring; at other times, the structures are already quite well developed. Their genesis and evolution are inseparable from the phenomenon of "dissent," even though they reach far beyond the arbitrarily defined area of activity usually indi~ cated by that term.

What are these structures? Ivan Jirous was the first in Czechoslovakia to formulate and apply in practice the concept of a "second culture." Although at first he was thinking chiefly of nonconformist rock music and only certain literary, artistic, or performance events close to the sensibilities of those nonconformist musical groups, the term second culture very rapidly came to be used for the whole area of independent and repressed culture, that is, not only for art and its various currents but also for the humanities, the social sciences, and philosophical thought. This second culture, quite naturally, has created elementary organizational forms: samizdat editions of books and magazines, private perfor~ mances and concerts, seminars, exhibitions, and so on. (In Poland all of this is vastly more developed: there are independent publishing houses and many more periodicals, even political periodicals; they have means of proliferation other than carbon copies, and so on. In the Soviet Union, samixdat has a longer tradition and clearly its forms are quite different.) Culture, therefore, is a sphere in which the parallel structures can be observed in their most highly developed form. Benda, of course, gives thought to potential or embryonic forms.of such structures in other spheres as well: from a parallel information network to parallel forms of education (private universities), parallel trade unions, parallel foreign contacts, to a kind of hypothesis on a parallel economy. On the basis of these parallel structures, he then develops the notion of a "parallel polis" or state or, rather, he sees the rudiments of such a polis in these structures.

From The Power of the Powerless, available here.

Here are Havel's thoughts on Egypt.

Get Back to Work, Phil!

I'm very interested in reading this paper after it has been written:

In the case of Egypt, there's also an argument to be made that the US effectively bought the end to one of the postwar era's most intense interstate rivalries. (One of the too many papers I'm working on at the moment develops this argument. When it is ready, I will post a version here. The preliminary results suggest that the best explanation for patterns of conflict between Israel and her neighbors is the amount of US foreign aid given. Standard factors like parity and rapid shifts in the distribution of capabilities do not have much effect, though they do help explain how much aid the US gives.)

On Second Thought...

You can watch the revolution, live and in progress, here. Marc Lynch is blogging it. I agree with Joshua Tucker that Twitter is the best source for up-to-date information, although caveat emptor.

My thoughts are still forming. Last night I tweeted:

I want democracy in #Egypt. I also fear democracy in Egypt. I hate that the US gov is backing Mubarak, but I know why. #nogreatoptions

That basically sums it up for me, and I'm glad to see the Obama administration walking back its support for Mubarak. Obama needs to get out in front of this. Soon. ADDED: Then again, Dubya's early support for the coup against Hugo Chavez back-fired, so maybe taking a wait-and-see approach is best. For a while.

Here is Obama's speech in Cairo 18 months ago.

UPDATE: Apparently the U.S. has been supporting Egyptian dissidents for years.