Wednesday, April 01, 2009

That guy used to work where?

Andrew Leonard in his How the World Works blog at Salon points out something that has been bothering me about an increasingly famous article by economist Simon Johnson in Simon Johnson's crusade against the oligarchs of Wall Street 03/31/09. Paul Krugman as well as some of my other favorite bloggers have cited Johnson's article, The Quiet Coup The Atlantic May 2009. Krugman notes that Johnson "served as the chief economist at the I.M.F.".

That's what Leonard focuses on with some highly relevant observations:

The central narrative gambit of "The Quiet Coup" is simple: The United States is unwilling to take the same harsh medicine it would prescribe to a developing nation that exhibited the same critical problem: domination of the political process by self-interested economic elites. But there is more than a little irony involved with the fact that this advice is coming from a former IMF chief economist. A great many people on the left who are applauding Johnson seem to have forgotten just how critical the IMF was in spreading exactly the kind of economic policies that helped secure Wall Street's absolute sway over global markets. Doesn't anyone remember "the Washington Consensus" -- the belief that deregulation, privatization and trade liberalization were the holy writ for all developing nations? The IMF was one of the primary proseletyzers and implementers of this vision. If your economy got into trouble, the IMF would help you out, but only after requiring "structural adjustments" that often caused significant hardship.

The result, particularly after the Asian financial crisis of the late '90s, was a massive rejection of IMF help by developing nations, particularly in East Asia and South America. If you're looking for reasons why so many countries in South America have turned sharply to the left, it is partially due to the pain caused by following IMF advice. If you want to know why China and other East Asian nations have built up huge reserves of foreign dollars, creating global imbalances that contributed to the creation of today's economic crisis, it is precisely because they wanted to avoid ever again being forced to come, hat in hand, to the IMF. As the Wall Street Journal notes on Tuesday, in "An Empowered IMF Faces Pivotal Test," "where once the IMF demanded that borrowers dramatically remake their economies, the IMF is now taking a softer stance, and attaching few restrictions to its massive loans." This is not out of the goodness of its heart, but because few developing nations are willing to accept the conditions that the IMF once required.
Now, I'm all for repentance and redemption and so on. But I'm not sure he's changed his Washington Consensus perspective all that much.

One bad sign is when he says early on in the Atlantic piece, referring to various crisis over the last two decades in Asia, eastern Europe and Latin America, "But I must tell you, to IMF officials, all of these crises looked depressingly similar."

If you take things to a high enough level of generalization, anything can be made to look similar to anything else, e.g., Earth and Mars are planets so they are basically similar. Given the record of the IMF, though, I have to wonder if all those crises looked so depressingly similar to the IMF and/or Simon Johnson because they were applying cookie-cutter assumptions to them.

The IMF's prescription for financial crises were depressingly similar: "deregulation, privatization and trade liberalization", as Leonard puts it, and I would add slashing public services to the bone. In Argentina's case, President Carlos Menem pretty much governed according to the Washington Consensus playbook, and it led to a new economic and political crisis at the end of 2001. The Washington Consensus gospel of free trade was actually a major cause of many problems. As Jamie Galbraith pointed out a couple of years ago, Rich World, Poor World The American Prospect 03/20/06:

China has adopted markets without capitalism; it has not had broadly open, speculative markets for capital assets and land. The result is that you usually have to make something in order to get rich. So companies produce and produce, flood the markets with goods, accept low profit margins, improve quality, and hope to strike gold by exporting to the West. If they have losses, as they often do, these may be covered by borrowing from China's rotten, state-owned banks, protected by capital control. Workers thrive on the glutted market for goods. Meanwhile, the richer local governments finance themselves with land rent and spend the proceeds on infrastructure at an incredible pace. [my emphasis in bold]
The point to which I wanted to call attention in that quote is the part about open capital markets. China has national capital controls, so that international speculators can't create a run on its currency the way they could in Indonesia or Argentina. (And, no, trolls, he isn't arguing there that only a Chinese-style economy can deal with that problem.)

The Washington Consensus at the moment is considered widely discredited because of its results. And because the results are so bad, it's worth asking how good the diagnosis has been.

In Johnson's case, his cookie-cutter diagnosis is, "the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis." Now, he defines the problem in a way that has its particular attraction at the moment, and one to which Krugman refers in the link above:

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise. ...

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests —financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them. [my emphasis]
It makes for great snark: the Republicans have made us into Argentina or Russia in their worst crises, har, har!

It's pretty obvious that excessive deference by the government to major financial interests has been a major contributor to the current mess. And there may well be important resemblances between this crisis and those of the other countries he names.

But I find Johnson's analysis problematic in several ways. I can see I'm going to be doing more than one post on this. But I see at least two key problems. One is that he focuses a lot on the problem of debt in the abstract. I can't help but wonder if there's not some notion that the federal budget deficit is our biggest problem lurking behind that. That's one place where those comparisons to other countries can be very misleading. The dollar is currently the world's reserve country and we have floating exchange rates. In those conditions, the combined public and private deficits are going to equal the external trade deficit. And as long as the dollar is the world's reserve currency, we'll have a trade deficit. In those conditions, balancing the federal budget as an economic goal is worse than meaningless, it's destructive.

The other problem is he conspicuously spares the Republican Party any particular blame for the current problem. This has a certain appeal for many Democrats because a lot of us are more than suspicious of our Party leaders' attachment to the some of the more reality-challenged pieces of corporate ideology. And he does so in a weird kind of blending of 60s hippie notions of false consciousness and Herbert-Hooverish pep talk about how "confidence" is all that really matters in economics.

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