Archive | September, 2012

Dark lines on Asia versus Eastern Europe (EE)

30 Sep

Tough facts put together by Rainer Kattel, Estonian economist, showing the mediocrity of the supposed economic miracle in Eastern Europe. Published in Journal of Post Keynesian Economics / Fall 2010, Vol. 33, No. 1 41

“While EE and other key developing countries experienced an exhilarating rise in FDI and exports, there is a stunningly obvious divergence in income growth between Asian economies and EE economies . China and Korea have seen their GDP per capita multiply at least four times since 1980, whereas EE economies have struggled throughout the past decades to stay above the 1980 level.

EE countries’ share in world trade grew from 0.73 percent in 1980 to 0.95 percent in 1995, and East asia’s share grew from 3.80 percent to 10.83 percent in the same period (Guerrieri, 1998, p. 29). this trend is especially pronounced for science-based industries: as EE grew from 0.29 percent to 0.39 percent in the period from 1980 to 1995, East asian economies grew from 4.83 percent to a staggering 17.82 percent (ibid., p. 38).

after the fall of the Berlin Wall, most EE and other former Soviet economies saw deep dives in their growth rates and in industry as well as service-sector value added. It took more than a decade for most EE countries to reach the growth and development levels of 1990. Many post-Soviet economies such as Ukraine, Moldova, and others, are still lagging behind their 1980s levels. In fact, for example, “even if Ukraine managed to grow steadily at 5 percent a year, starting in 2002, it would take until 2017 to regain its previous peak—implying a transformational recession of more than a quarter of a century at best” (World Bank, 2006, p. 33). For these countries, the recession they experienced in the 1990s is worse than the Great Depression in the United States and World War II in Western Europe.”

Sweden puts no comfort food on the austerity menu

30 Sep

So here’s the latest word on this from Martin Flodén, econ prof at Stockholm university who found the 1992 Swedish austerity package to be a great success. The problem is more complicated in this case (see Blyth’s Great Transformations) but even if one agrees with Floden one still has to face the fact that austerity in Europe today is unlikely to pull off a Swedish feat. Here’s professor Floden:

Fiscal austerity was effective during the Swedish economic crisis, but that insight is not particularly helpful today. Austerity would have been more complicated both economically and politically if it had not been supported by currency depreciation and strong external demand, and crisis countries today do not benefit from such developments. Attempts to consolidate before growth had resumed failed in Sweden. One possible interpretation of these observations is that prospects to consolidate are bleak until competitiveness has been restored in crisis economies.

The point is clear: fiscal austerity works in tightly specified conditions that are simply not there today.More specifically

First, and most importantly, the sharp depreciation of the Swedish exchange rate in combination with strong growth on export markets was a crucial aspect of the Swedish recovery. This resulted in an export-led recovery, which facilitated crisis management. If rapid economic growth had not resumed quickly:

… the general guarantee extended to the banking system could have turned out much more costly, as a similar guarantee did in Ireland more recently.
… the recapitalisation of the banking system in 1992 and 1993 would most likely have been insufficient.
… fiscal consolidation, in particular in 1995 and 1996, might not have been economically or politically feasible (there are clear indications, by the way, that the consolidation was contractionary).

Today’s crisis countries have problems restoring competitiveness, partly because of fixed exchange rates and partly because competitiveness is relative to other countries that now face similar challenges (see Figure 2, and note that Krugman 2011 and others argue that the Irish data are misleading). And in this global recession, they cannot benefit from benign world market developments as Sweden did. The successful Swedish austerity program in the mid-1990s does not, therefore, provide many insights to the ongoing debate on austerity versus stimulus (see for example Alesina and Giavazzi 2012, Corsetti 2012, and DeLong 2012).


Growth, default and political polarization

30 Sep

New study by Caroline Van Rijckeghem, and Beatrice Weder di Mauro says fundamentals are good for democracies but strong growth is pivotal to avoid default:

It well known, growth is critical for avoiding default through its impact on both the size of the deficit and the scaling variable in the debt-to-GDP ratio. The empirical counterpart is that no default on external sovereign debt was ever observed in a democracy with growth over 3.4% provided there was sufficient balance-of-payment liquidity support. The implication for the Eurozone is that to restore safety, higher growth needs to be actively pursued.

Growth also helps prevent political polarisation, and here another result is revealing. Default on external debt did not happen in any democracy in periods of low international interest rates (specifically a US treasury bill rate of less than 5%) when there were sufficient political constraints (as measure by Henisz’ Polcon index)1. Sufficient representation of interests against default (those depending on trade who might face sanctions, those owning government debt or bank stocks which would suffer in case of default, etc.) has ensured that. Growing discontent as the result of austerity may be the most important factor yet in influencing the probability of default.

Joy Division and Boris Buden

30 Sep

“There is no neo-liberal, postindustrial privatization that could be translated back into a social democratic welfare state, and no cultural deconstruction translatable back into political essentialism. Translation must also be understood as another name for a point of no return, another name for what many still call history, at a point when it cannot be perceived any more in terms of a universal process.”

“Ultimately, a translator is in any case always a traitor or, as the saying goes, traduttore traditore. Whoever translates, betrays. Let’s do it then on political purpose.”(Brris Buden)

Blyth and Kinsella on the European Crisis

25 Sep

Romania during the Great Depression

25 Sep

Cornel Ban (except from Neoliberalism in Translation)

The economic turmoil triggered by the financial crisis of 1929 dealt a heavy blow to the modernization project of Romanian liberal elites. Faced with the first spasms of the crisis in 1929, the new Agrarian Party government applied a macrostabilization package demanded by the foreign banks that financed the bulk of the government deficit, with the French central bank playing the leading role.
Thus, faced with the massive transfers of hard currency made by the local chapters of foreign banks, the central bank decided to stick with France’s “Gold Bloc” and refused to introduce convertibility controls until 1932, which led to an unprecedented hemorraging from the hard currency stock. Second, fiscal policy was contractionary. Budget deficits and state spending were cut, leading to cuts in wages for the state’s numerous employees or for their non-payment for several months. Third, the protectionist laws of 1924 were scrapped. Foreign capital was welcomed, with some of the foreign loans being paid by granting lucrative monopolies (telephones, road building and matches) to the foreign lenders.
The macrostabilization package ended up aggravating the state of the economy and leading to debt rescheduling negotiations in 1933. The terms were humiliating: foreign banks demanded, and ultimately attained, a decision to put the country’s finances under the control of a joint committee of the League of Nations and representatives of foreign banks (Axenciuc 1997: 361). As foreign banks began to reduce their exposure in Romania, as the world demand for Romanian grain and oil fell, and as domestic demand remained constantly low, the economy entered into a tailspin. The fall in demand led to a deflation rate of 30 percent and to a collapse in the real value of wages of 27 percent. Between 1929 and 1933 gross output and industrial production were halved and almost 500 factories entered bankruptcy. As a result, almost a third of the industrial labor force became unemployed and state receipts fell by almost 40 percent.
The social costs of the macrostabilization were considerable. There were 370 industrial strikes, some of them concluding with the shooting of large numbers of strikers by gendarme and army regiments sent to quell the protests. Yet the social downfall of the crisis did not lead towards a more socially embedded liberalism, as it did in other agricultural European states at that time (e.g. Denmark). On the contrary, the failure of the Agrarians to stick to a more socially progressive agenda strengthened the hand of authoritarian social forces. The weakness of the Marxist left exacerbated the situation: the social-democratic vote was largely insignificant, and the communists’ subservience to Moscow as well as their questioning of Romania’s borders with the USSR made them largely insignificant even when they were allowed to compete in elections. Against this background, the far-right became increasingly successful at attracting the votes of peasants and urban lower middle classes.
As world demand for grains and oil picked up in 1934 and as the state boldly increased domestic demand through a spike in military orders, the output grew again after 1934. Yet the liberal project had been politically damaged, because the authoritarian forces grouped around the monarch, who was inspired by fascist corporatism and far-right parties, took control of popular discontent. As a result, the liberal project came to an end in 1938 when King Carol the Second dissolved the Parliament, instituted single-party rule and terminated the long-standing constitutional regime.

Why the Keynesians lost

24 Sep

Cornel Ban and Daniela Gabor “The Politics of Collateral Damage: Finance and Varieties of Capitalism in the Eurozone Crisis” forthcoming)

“Constructivist political economists argue that the analysis of policy shifts should focus on the political battles that define the origins of crises and the solutions that are institutionally available (Widmaier, Blyth and Seabrooke 2007: 748; Blyth 2002; 2012; Lindwall 2009; 2011; Mandelkern and Shalev 2012; Biswas 2011; Vali 2011; Hay 2011; Schmidt 2011; Carstensen 2011; Radula and Kattel 2011; Ban 2011; Bell 2012; Matthijs 2012; Yee 2012; Widmeier and Park 2012; Baker 2012; Finlayson 2012). When applied to the fiscal outcomes studied in this paper, the constructivist approach yields the hypothesis that the adoption of austerity measures throughout the Eurozone has been the result of the victory of anti-Keynesian ideas in pivotal nodes of the European policy field. Specifically, they seek for evidence of the intellectual skepticism of New Consensus macroeconomists about the long-run effectiveness of fiscal policy during a recession marked by financial market volatility and a strong sovereign risk channel effect (for an overview and critique see Arestis 2009).

While few doubt the fiscal policy skepticism of European central bankers (Gabor 2011; Cecchetti 2011), the situation is less clear at the level of national policy elites and the economics profession where no research has been carried out so far. Constructivists also have to explain the shift for “Keynesianism for about ten months” (Blyth 2012) to the neoclassical (New Consensus) retrenchment of 2010. Thus, concerns with the contractionary effects of fiscal austerity in Europe were voiced inside the IMF, an erstwhile proponent of fiscal adjustments to address competitiveness issues (Blanchard 2010; Pescatori et al 2011). Most importantly, outside of the world of European central banks, in late 2008 and early 2009 the kind of activist fiscal policy associated with the Keynesian tradition seemed to dominate the approach to the crisis of national policy elites. If this was so, what explains the abandonment of Keyensian ideas on fiscal policy and the return to New Consensus macroeconomics by the same elites towards the end of 2009?

Two constructivist studies delved into the puzzle of austerity empirically and in a way that showcases the centrality of the interaction of power and ideas (Farrell and Quiggin 2012; Blyth 2012). Their findings can be summarized as follows: in 2008-2009 leading American Keynesian economists and a coterie of prominent defectors from New Consensus macroeconomics managed to provide usable policy theories to policy elites confronted with an unprecedented crisis that appeared to be better explained by Keynesians than by their foes. As Mark Blyth’s history of austerity avers, 2008 and 2009 were the years of an intellectual tailspin in orthodox economics:

A large part of the reason that Keynesianism became the policy du jour was that governing neoliberal ideas pretty much denied such a crisis could ever happen. So when it happened it was bound to open up some room for ideas that said such events were bound to happen if you left markets alone to regulate themselves, which is exactly the Keynesian point. Given this, it was hard to defend publicly the logic of self-correcting markets at a time when they were so obviously not self-correcting […] Furthermore, as well as denying it could happen, neoclassical policy was entirely focused upon avoiding one problem, inflation, and providing one outcome, stable prices. As a result it seemed to have very little to say about a world where deflation was now the worry and price stabilization meant raising, not lowering, inflation expectations.

By 2010, however, the newfound Keynesian equilibrium of a seemingly disrupted macroeconomics field was ruptured by the fading effects of the post-Lehman financial crisis and the emergence of a new crisis in parallel with a strategic regrouping of New Consensus economists. The new crisis was the deterioration of deficit and debt levels following the extensive bank bailouts from 2008 and 2009 and the effects that the financial crisis had on automatic stabilizers. To boot, the Greek fiscal scandal of early 2010 sent the cost of borrowing in the euro “periphery” soaring. The confluence of these events provided opportunities for skeptics to widen the debate and call for fiscal consolidation now that the worst of the crisis was over. But what shifted the ground decisively against Keynesians was the pro-austerity mobilization of the hitherto silent European Central Bank and of the once pro-stimulus European Commission and OECD (Lutz and Kranke 2011). This offered Germany an opportunity to argue for rapid consolidation despite American pressures to do the opposite. Germany’s ideational entrepreneurship was hardly surprising for this a policy leader in the Eurozone given thet its bipartisan Ordoliberal policy establishment had been highly biased against Keynesianism’s inflationary risks throughout since the end of WW2. As Blyth puts it

Germany gave austerity a new lease of life via the social market economy and its postwar economic miracle. ‘Erst sparen, dann kaufen’ leaves no room for the profligate except austerity, and it allows no room for compensation apart from that which speeds the adjustment of the market. The imprint of these ideas on the institutions of the EU is not in doubt. There is no place for Keynes and compensation in an economic union where competition produces income and growth through the production of competitive products and the running of surpluses – not the shallow demand of the money press. In such a world, the slump, not the boom, is the right time for austerity (Blyth 2012).

The constructivist account is powerful but it needs further specification of the reason why coordination was ultimately achieved even in countries like Spain, where the policy elite in charge did not easily buy the credibility thesis (Ban 2012). One way to address this gap is to explore the explanatory potential of the hierarchical relations characteristic of European governance. One hypothesis that could be derived from this approach is that the pro-austerity E.U. coalition (Germany and its allies, the ECB, the Commission) had the power and used it against dissenting policy elites (and publics). Another avenue is to turn to an analysis of the constraints put on the fiscal policy space of all European sovereigns by the long-run effects of financialization and the sudden stop in transnational financial flows from export (coordinated) economies to liberal and mixed varieties of capitalism.”