Archive | April, 2012

Why the Keynesians Lost the Debate

28 Apr

A recent paper by Farrel and Quiggin puts it bluntly:

“In 2008-2009, it was important that a relatively small number of ‘star’ economists, mostly based in the US, made vigorous arguments for Keynesianism. It was also important that some key figures who previously had not been favorably disposed to Keynesianism changed their minds. This helped prop- agate the idea of Keynesian stimulus to economists who otherwise would likely have been inoculated against it. Some of these economists – such as members of the Council of Eco- nomic Experts – played a key role in changing the field of debate within Germany and other European countries. Even if the actual consensus among economists was rather less solid than it appeared to outside observers, the appearance of an emerging consensus was what mattered.

In 2010 in contrast, it mattered that there was a greater degree of disunity among economists in the US and within the IMF than there had been in the previous period. It also mattered that a new group of elite economists – those associated with the European Central Bank – had entered the fray. The debate was not nearly as one sided as it had been in the first instance. The contagion of the previous period in part reversed its course.

Whether expert economists were deeply convinced, half-convinced, or not convinced at all by Keynesian ideas, did not matter as much as the external perception, in large part generated by patterns of propagation, that there had been a sea-change in the discipline. Strategic silences as well as Damascene conversions helped to perpetuate this perception.”

Farrel and Quiggin on Keynesian ideas_2012

The Great Transformation of East European Banking

27 Apr

According to transition economics, a branch of neoclassical orthodoxy, the transformation of East European banks mostly into a foreign-bank dominated banking system – served as a disciplining tool to break the links between banks and incumbent, formerly state-owned enterprises and thus the cycle of non-performing loans, bank recapitalisation and inflation.

How did this actually happen?

Comparing ownership patterns in 1997 and 2005 across transition economies shows the enormous transformation banking sectors across the region have gone through. In 1997, eight transition economies still had predominantly government-owned banking systems, while 11 had banking markets dominated by domestic privately-owned banks. There were only five countries with predominantly foreign-owned banks, notably Bulgaria, Estonia, Hungary, Macedonia, and the Slovak Republic. Two thirds of countries in 2005 had banking systems dominated by foreign banks, with only four countries retaining predominantly government-owned banking systems and six having banking systems dominated by domestic private banks. With the notable exception of Slovenia, where domestic private banks constitute the largest component of the banking market, all new EU countries and Croatia are dominated by foreign banks. In 2005 the ratio of foreign-owned assets in total banking assets reached over 80% in Bosnia, Lithuania, Croatia and the Slovak Republic and almost 100% in Estonia and Hungary. Foreign-owned banks provide 90% of the credit to non-bank residents in emerging Europe compared to 30% in developed Europe.In contrast, the foreign share is less than 20% in emerging Asia. In relation to advanced economies, the foreign bank share is around 25% for the EU and the US (but less than 5% for Japan).

From this standpoint, only Eastern Europe and Sub-Saharan Africa look like enclave financial systems.

CEPR report, “Cross-Border Banking in Europe”

Hourly Wages in Europe

26 Apr

The Financial Instability Hypothesis: Rereading Mynski

26 Apr

The financial system should be imagined as a fundamentally unstable process, rather than a self-balancing one. In 1992 Hyman Mynski conceptualized this in a most elegant way. Worth rereading.

The Financial Instability Hypothesis (FIH) has both empirical and theoretical aspects that challenge the classic precepts of Smith and Walras, who implied that the economy can be best understood by assuming that it is constantly an equilibrium-seeking and sustaining system. The theoretical argument of the FIH emerges from the characterization of the economy as a capitalist economy with extensive capital assets and a sophisticated financial system.In spite of the complexity of financial relations, the key determinant of system behavior remains the level of profits: the FIH incorporates a view in which aggregate demand determines profits. Hence, aggregate profits equal aggregate investment plus the government deficit. The FIH, therefore, considers the impact of debt on system behavior and also includes the manner in which debt is validated.

Minsky identifies hedge, speculative, and Ponzi finance as distinct income-debt relations for economic units. He asserts that if hedge financing dominates, then the economy may well be an equilibrium-seeking and containing system: conversely, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a “deviation-amplifying” system. Thus, the FIH suggests that over periods of prolonged prosperity, capitalist economies tend to move from a financial structure dominated by hedge finance (stable) to a structure that increasingly emphasizes speculative and Ponzi finance (unstable). The FIH is a model of a capitalist economy that does not rely on exogenous shocks to generate business cycles of varying severity: business cycles of history are compounded out of (i) the internal dynamics of capitalist economies, and (ii) the system of interventions and regulations that are designed to keep the economy operating within reasonable bounds.

Full text here:
mynsli 1992

Let’s get this straight: The crisis is the fault of private capital

26 Apr

The problem in the Eurozone was not indiscipline in the public sector – it was indiscipline in the private sector, which lent and borrowed at spreads to national interest rates. In Spain, non-government debt rose from 80% to 270% of GDP. In Germany where there was least impact on interest rates, German private-sector debt as a percentage of GDP hardly budged in comparison. The European credit crisis relates more to Hyman Minsky’s ‘Financial Instability Hypothesis’ than to the ‘it was the Greeks’ fault!’ school of thought of some politicians (see Minsky 1992).

Excessive, debt-financed private consumption in one country relative to another will be reflected in, but is not caused by, national current-account positions. And just as in emerging-market crises of old, when there was a loss of confidence in the asset values underpinning private borrowing, there was a sudden stop of the private flows that were financing these current-account positions.

More at
http://www.voxeu.org/index.php?q=node/7911

What was Ordoliberalism and why should we care?

24 Apr

Cornel Ban

We should care because it shapes the thinking of the policy establishment in Germany and therefore in the eurozone. Increasingly, ordoliberal ideas are being translated into some stonewashed version of laissez faire economics in Eastern Europe. But where does this thing come from and how is it different from laissez faire liberalism? Te short answer is that it comes from Germany and it allows for more state and social solidarity than market fundamentalists present it to be.

Built between the 1930s and 1950s by such luminaries of German economics as Walter Eucken, Wilhelm Röpke, Franz Bohm and Alfred Muller-Armack, Ordoliberalism sought a middle path between socialism and laissez-faire liberalism. It did so by promoting the use of a strong state in order to build and guarantee an institutional environment in which the free market produces results close to its theoretical potential (Röpke 1944; Watrin 1979; Rieter and Schmolz 1993; Gerber 1994; Koslowski 2000; Labrousse and Weisz 2001; Ptak 2009; Vanberg 2011). With some adaptations, Ordoliberal economic ideas shaped postwar Germany’s “social market economy” and are credited with shaping the institutions that made possible the country’s Wirtschaftwunder.

Ordoliberal theory holds that public policy should be guided by the imperative of building a competitive market economy through upholding a set of credible rules and institutions. Considered a form of “liberal conservatism” by one of its founding fathers (Röpke1944), Ordoliberal theory was slightly different from laissez faire liberalism and its linkages with select aspects of Austrian School and Historical School economics should hinder its conflation with the neoclassical tradition. Unlike other intellectual traditions closer to laissez-faire liberalism, Ordoliberalism was selectively skeptical of unfettered markets, although this skepticism used liberal arguments. Its proponents pointed to markets’ natural propensity to give birth to oligopolies, monopolies and worrisome social disruption; they consequently pleaded for “liberal interventionism,” a hybrid policy framework that blended collective bargaining, anti-monopoly/oligopoly institutions, centralized coordination among firms, minimal social safety nets, low inflation, independent central banks, balanced budgets and free trade. Thus, the state as such was seen not merely as a neutral aggregator of individual interests, but also as a meritocratic agent entrusted to advance the economic welfare of the nation through increasing economic competitiveness. In the words of Ordoliberal theorist Christian Watrin, the core statement of the Ordoliberal normative theory of the state was that
“Unless a liberal constitutional state is prepared to see itself deteriorate into an interventionist state in which economic processes are manipulated to suit political opportunism, the maintenance and enforcement of the rules of a competitive system must be regarded as one of its prime objectives (1979: 413).”

In other words, East European liberals rushing to equate Ordoliberalism with market fundamentalism should take it easy.

A New Developmental State?

24 Apr

Cornel Ban

The term neo-developmentalism was first used in 2003 by Brazilian economist and former policy maker Luiz Carlos Bresser-Pereira, in an attempt to define an alternative to the Washington Consensus orthodoxy (Bresser-Perreira 2003; 2004; 2007; 2009, 2010). Similarly important in this debate has been the advocacy of Antonio Barros de Castro, a state bank official during the Lula years (Castro 2008) and the work of sociologist Celia Kerstenetzky on the importance of marrying developmentalism and the welfare state (Kerstenetzky 2010; 2011). By the end of the decade, the term caught up in some quarters of Brazilian economics and political economy (Sicsu et al 2004; Arbix and Martin 2010; Doctor 2009; Morais and Saad-Filho 2011) just as it began to enter the international development discourse (Khan et al 2010). In 2010, at a Sao Paolo convention prominent Brazilian and international scholars merged structuralist and Keynesian thinking into a new development paradigm in a manifesto entitled “Ten Theses on Neo-Developmentalism.” [1]

According to its advocates, neo-developmentalism entails a new form of state activism. Its core is a national capitalist development program meant to guide the transition of developing countries away from the Washington Consensus. The main aim of this program of national capitalist development is the achievement of full employment in conditions of price and financial stability. In terms of its intellectual lineage, neo-developmentalism shares a number of characteristics with ISI or “old” developmentalism. [2] The first is the assumption that the world economy consists primarily of nation-states that compete with each other through their firms, an assumption that entails the espousal of varying degrees of economic nationalism. But rather than lead to some variant of ISI, in the case of neo-developmentalism economic nationalism means the adoption of a development strategy that allows domestic firms to seize global economies of scale and technological updating processes, but also innovation policy and an activist trade policy targeted at strong intellectual property regimes and investment opportunities for domestic firms. The second commonality is an understanding of economic development as a structural process. This entails commitment to the mobilization of all available labor resources, increasing productivity in each industry and the steady transfer of finance to high wage and high value added sectors.

On other fronts, the differences with old developmentalism are more marked. Unlike the protectionism and export pessimism of old developmentalists, neo-developmentalists think that since middle-income countries have overcome the infant industry stage, protectionism should be scrapped and the goal of the open economy should be accepted as fundamental. This acceptance is predicated on important interventionist qualifications, however. The goal of the open economy should be complemented by the goal of using industrial policy to increase the share of medium and high value added products and services. This is to be done through industrial policies targeted at firms judged to be able to compete internationally.

This renewed stress on industrial policy comes at a time when new frameworks for rethinking development such as “new structural economics” (Lin 2011; Lin and Chang 2011) are picking up steam in academia and the IFIs (Joon Chang 2011; Krueger 2011). Justin Lin, the World Bank’s chief economists, recently advocated for a “new structuralism” that emphasizes the centrality of both market mechanisms and state interventions in development. Lin stresses that there are large gains to be made from state-sponsored industrial upgrading and diversification strategies that build on a country’s existing comparative advantage. Other scholars have disputed this approach and argued that industrial policy should target technologically advanced industries in which the country does not necessarily have a comparative advantage, albeit without making excessive leaps away. In this market-making approach the state nudges domestic and foreign producers to go faster up the ladder of technological sophistication than the market “tells” them to, thus fostering comparative advantage over time (Joon Chang 2009; Wade 2010).

While there is no manifest consensus among neo-developmentalists on the weight of market-conforming industrial policies versus market making ones, the Sao Paolo manifesto contributes to this debate by stressing the macroeconomic dimension of industrial policy. Drawing on a mix of post-Keynesian and structuralist thinking in economics, its signatories argue that “the demand side is where the major growth bottlenecks unfold” and that “in developing countries there are two additional structural tendencies that limit demand and investment: the tendency of wages to increase at rates below the growth of the productivity, and a structural tendency to overvaluation of the nominal exchange rate.” (Sao Paolo Manifesto 2010). To address the first predicament they advise the adoption of increasing the legal minimum wage, cash transfers to the poor, and a government guarantee to provide employment at a living wage. And to address exchange rate overvaluation and fluctuations in market sentiment, neo-developmentalists suggest that economic development should be financed essentially with domestic savings.

Finally, contrary to the old developmentalist complacency towards inflation, the neo-developmentalists join the orthodox in upholding an unwavering inflation aversion. Yet, unlike the orthodox, neo-developmentalists think that this objective should not come at the cost of high interest rates. The goal of macroeconomic stability found in the Washington Consensus is complemented with a firm commitment to full employment and a more progressive distribution of income. The orthodox faith in untrammelled free trade is replaced with acceptance of capital controls, conservative foreign indebtedness ratios and the accumulation of domestic public savings in order to increase the investment rate.

All these concepts are obviously ideal types. If old developmentalism and the Washington Consensus are the extreme ends of the liberal-statist policy spectrum, neo-developmentalism is somewhere in an uneasy middle. As my analysis shows, Brazilian policy elites certainly accepted enough of the neo-developmentalist theses to fit under the aegis of this term but yielded to enough economic orthodoxy to be closer to the liberal end of the neo-developmetalist spectrum. The use of the adjective “liberal” in “liberal neo-developmentalism” could be useful for future scholars who may wish to distinguish Brazil’s policy regime from other neo-developmentalist alternatives in the Latin American region and elsewhere.

[1] The Sao Paolo meeting of a group of economists self-describes as “sharing a Keyensian and structuralist development economics approach” was financed by the Ford Foundation and organized by the structuralist development macroeconomics center of the Sao Paolo School of Economics of the Getulio Vargas Foundation. The meeting resulted in the adoption of a manifesto called “ten Theses on New Developmentalism” and was signed by a long list of Brazilian and international luminaries including Phillip Arestis, Luiz Carlos Bresser-Pereira, Ha-Joon Chang, Paul Davidson, James Galbraith, Luiz Fernando de Paula, Adam Przeworski, Osvaldo Sunkel and Robert Wade.

[2] For the application of the concept of “old” or ISI developmentalism to Brazil see Leff (1968), Bergsman (1970), Fishlow (1972), Suzigan (1976), Cardoso and Faletto (1979), Evans (1979), Geddes (1990), Sikkink (1991), Schneider (1991; 1997), Kohli (2004).

Excerpt from “Brazil’s Liberal Neo-Developmentalism: Edited Orthodoxy or New Paradigm:” forthcoming in Review of International Political Economy.

cornel ban_brazil_revised