December 19, 2003
Lula da Silva Survives His First Year

Brazil's President, Once a Dark Horse, Describes a Bright Present: President Luiz Inacio Lula da Silva, defending the unpopular pro-market policies he once demonized but which have marked his first year in office, said on Thursday that the sacrifices Brazilians had made this year would be repaid with sustained economic growth. Summing up his first 12 months as president, Mr. da Silva, the first working-class Brazilian to win the office, said his government had been forced to resort to old-fashioned fiscal discipline to stave off the economic collapse that loomed at the start of his administration. Panicked by Mr. da Silva's past as a fiery labor leader, traders sent Brazilian bonds and the currency tumbling last fall. Banks shut off credit lines to companies, leaving the country all but dependent on support from the International Monetary Fund. When Mr. da Silva took office Jan. 1, he surprised many by choosing a market-friendly economic team that promptly reined in galloping inflation by raising interest rates and cutting more than $4 billion from the government budget. "Many believed, and with reason, that Brazil would not survive the crisis," Mr. da Silva told government ministers, lawmakers, generals and labor leaders gathered at...

Posted by DeLong at 05:38 PM

November 03, 2003
Notes: The Output Collapse in Eastern Europe

Olivier Blanchard and Michael Kremer say many very smart things about the extraordinary output decline in eastern Europe after the collapse of communism: Olivier Blanchard and Michael Kremer (1997), "Disorganization," Quarterly Journal of Economics 112:4 (November), pp. 1091-1126: Stable URL:http://links.jstor.org/sici?sici=0033-5533%28199711%29112%3A4%3C1091%3AD%3E2.0.CO%3B2-L | Abstract: Under central planning, many firms relied on a single supplier for critical inputs. Transition has led to decentralized bargaining between suppliers and buyers. Under incomplete contracts or asymmetric information, bargaining may inefficiently break down, and if chains of production link many specialized producers, output will decline sharply. Mechanisms that mitigate these problems in the West, such as reputation, can only play a limited role in transition. The empirical evidence suggests that output has fallen farthest for the goods with the most complex production process, and that disorganization has been more important in the former Soviet Union than in Central Europe....

Posted by DeLong at 11:31 AM

October 12, 2003
Look at Migration, Technology Transfer, and Financial Crises

Richard Freeman says, "Stop spending so much time thinking about the WTO. Technology transfer, international migration, and financial crises have orders of magnitude more important impacts on human welfare and the state of the economy." I think he's probably right: Trade Wars: The Exaggerated Impact of Trade in Economic Debate: ...Comparing the claims made in this debate with the outcomes of trade agreements, this paper finds that the debate has exaggerated the effects of trade on economies and the labor market. Changes in trade policy have had modest impacts on labour market. Other aspects of globalization -- immigration, capital flows, and technology transfer -- have greater impacts, with volatile capital flows creating great risk for the well-being of workers. As for labor standards, global standards do not threaten the comparative advantage of developing countries nor do poor labor standards create a 'race to the bottom'....

Posted by DeLong at 03:50 PM

July 25, 2003
The Durability of the Social-Insurance State

Peter Lindert thinks hard about just why it is that the high-tax high-benefit social-insurance states of the twentieth century appear to have managed to redistribute income and provide enormous amounts of social services and social insurance without suffering any measurable penalty in terms of their rates of economic growth. He may well be right. It's certainly worth thinking about: Why the Welfare State Looks Like a Free Lunch: The econometric consensus on the effects of social spending confirms a puzzle we confront in the raw data: There is no clear net GDP cost of high tax-based social spending on GDP, despite a tradition of assuming that such costs are large. The paper offers five keys to this free lunch puzzle. First, the costly forms of transfers usually imagined have not been practiced by real-world welfare states. Second, better tests confirm that the usually imagined costs would be felt only if policy had strayed out of sample, away from any actual historical experience. Third, the tax strategies of high-budget welfare states are more pro-growth and less progressive than has been realized. Fourth, the work disincentives of social transfers are so designed as to shield GDP from much reduction if any. Finally,...

Posted by DeLong at 02:42 PM

July 08, 2003
Notes: Blanchard on Transition

Olivier Blanchard's view on the transition from communism to capitalism as of the mid-1990s. If I read his Economics of Post-Communist Transition right, the key problem was the absence of a Marshall Plan to keep demand high and employment high during transition. In the immediate aftermath of World War II in Western Europe, the Marshall Plan allowed countries to maintain high aggregate demand without worrying about balance-of-payments constraints. There was no similar inflow of hard currency in the early 1990s to allow transition governments to create the demand to rapidly reemploy those laid off from state industries. The Bush I Administration had, because of the Reagan deficits, "more will than wallet." As a result, Blanchard argues, high unemployment led to a fear of reallocation and restructuring, and the slowing of the entire process of reform down to a glacial pace. If only demand and employment could have been kept high during the initial stages of transition... And since the mid-1990s? Since Blanchard wrote his book, what has happened? If I read the data right, economic progress in Central Europe has been slow, in Eastern Europe has been very slow, and in the former Soviet Union (where there never was the...

Posted by DeLong at 03:28 PM

July 07, 2003
Neoliberalism Rides Again?

The Wall Street Journal says to watch what the new government's economic policy is, not what it says that it's policy is: WSJ.com - Argentina's Rebound Shows IMF's Principles Still Thrive: ...New Argentine President Nestor Kirchner agrees with the latter assessment, arguing that the "neoliberal model" had failed his country. Yet his economic team promises an agenda that Washington Consensus advocates would applaud: inflation-targeting, fiscal restraint, tax overhaul, financial restructuring and market-driven infrastructure solutions. Utilities, trapped in a postcrisis rate freeze and facing contract renegotiations, can be forgiven for doubts. But, at the same time, there is no great movement to renationalize their businesses, especially after the most left-leaning candidates did poorly in recent elections. What is emerging is a distinction between the image of the Washington Consensus as a whipping boy and the continued, if less dogmatically applied, implementation of its principles. Argentine policy makers seem conscious of the good things privatization brought -- healthier water, lower electricity rates, functioning telephones -- they don't really want to turn back the clock. What they are doing is selling the idea differently: They are bashing the 1990s "model" but still embracing the language of the market. Economy Minister Roberto Lavagna argued...

Posted by DeLong at 10:25 AM

June 05, 2003
Gains From International Trade and Investment

An Irish-Arizonian-Australian cross-disciplinary alliance of Kieran Healy and John Quiggin is thinking about Pierre-Olivier Gourinchas and Olivier Jeanne's brand-new "The Elusive Benefits of International Financial Integration"--the conclusion of which is that in standard neoclassical models freeing up capital flows across nations has the capability to boost economic welfare by an amount on the order of magnitude of one percent: John Quiggin: (Small) gains from trade: (Small) gains from trade: Kieran Healy links to a paper by Pierre-Olivier Gourinchas and the missing-from-the-web Olivier Jeanne in which a calibrated growth accounting model is used to show that the gains from unrestricted capital mobility are likely to be of the order of 1 per cent of GDP. Gains from risk sharing aren't mentioned but other papers are cited to say that these are of a similar magnitude. Those who listen to the general pronouncements of economists might be surprised by the modest size of the estimated gains. But for those who have looked at similar exercises in the past there is no surprise here. One of the better-kept secrets of economics is the fact that most studies suggest that the replacement of a typical high-tariff regime (say Australia's in the 1960s) will yield...

Posted by DeLong at 07:09 AM

May 16, 2003
Still Optimistic About Brazil

The Economist is still optimistic about Brazilian President Lula's chances for pushing through his planned reforms of pensions and taxes... Economist.com | Reforms in Brazil: ...What matters now is how many votes Lula can muster in Congress. Neither proposal is likely to pass unscathed. Both involve constitutional amendments, which must pass twice by three-fifths majorities in both the Chamber of Deputies and the Senate. A lot can happen on the way. To mild surprise, Lula included a contentious clause to reduce the pensions of existing retirees, a measure demanded by the states to shore up their finances. This may be watered down--perhaps by raising the portion exempted from the new charge--or eliminated. Although that would denude the pension reform of much of its immediate fiscal impact, it would not trouble the financial markets much. "If they keep the rest, it's still meaningful," says Carlos Kawall, chief economist at Citibank in Sao Paulo. The tax bill is a hotch-potch, rather than a thorough overhaul. It would unify 27 different state value-added taxes and convert a separate tax on company turnover into a proper VAT. Though less controversial than the pension plan, the tax bill benefits some sectors at the expense of...

Posted by DeLong at 08:53 PM

May 14, 2003
Notes: Grigore Pop-Eleches, "Refracting Conditionality: IMF Programs and Domestic Politics During the Latin American Debt Crisis and the Post-Communist Transition"

I have to read a political science dissertation tonight. It's very good... Grigore Pop-Eleches (2003), "Refracting Conditionality: IMF Programs and Domestic Politics During the Latin American Debt Crisis and the Post-Communist Transition" (Berkeley, CA: U.C. Berkeley Ph.D. Diss.). To the extent that neoliberal reforms are consolidated in any but the most developed countries of the two regions, the relative success stories discussed in this dissertation (Bolivia and Bulgaria) revealed a highly contingent pattern of deep initial economic crisis, skillful political coalition building, and generous Western support... the importance of taking advantage of the initial economic crisis... to forge a more durable political coalition in support of economic reforms. While.. the importance of such coalitions is easy to ignore during the post-electoral honeymoon period, governments that succumb to the temptation of insulated economic policy decision-making have a much more difficult time sustaining economic reforms once their popularity is undermined by the sometimes sizeable social costs of such reforms.... another interesting dilemma... the statistical results and the discussion of Bolivia's unlikely neoliberal reform coalition confirm the importance of rent sharing as the glue that binds together social and political actors.... On the other hand, the increasing neoliberal emphasis on privatization, deregulation,...

Posted by DeLong at 05:18 PM

May 07, 2003
Notes: World Bank Private Sector Development Forum

PSD FORUM History--JMK and HDW. Feared a world in which the capital requirements of development were immense (think Alex Gerschenkron), and in which sovereigns had a very difficult time borrowing. When you think about it, after all, given experience from start of WWI, why should sovereigns have been able to borrow on a large scale? Bulow and Rogoff. Hence World Bank. Broadly speaking, belief in the US during the 1930s and 1940s that successful growth and development required three things: Public investment in infrastructure. Social democracy--understood as full employment, safety net, income distribution sufficiently equal to make politics a positive rather than a zero-sum game in which, say, rich in U.S. inheritance taxes poor in Ghana take the cocoa export revenues fron the Ashantl. Third: market competition: Low tariffs, stable currencies, exports, comparative advantage, markets, and private businesses. Extraordinary success in nw and s europe. Extraordinary success in East Asia. Had you asked people in 1945 economic destiny of France... One of my teachers, David Landes, reputation France family capitalism... Italy... Argentina. Elsewhere. Disappointing. Glass half-empty. Indicative planning administrative guidance seemed to work fine in France and East Asia--for a while at least. Elsewhere... Infrastructure... Exchange rates... Regional development... If...

Posted by DeLong at 09:45 PM

April 17, 2003
Uncle Milton

Just spent an hour and a half being interviewed for a documentary about Milton Friedman to air (hopefully) sometime in 2004... Some after-the-fact notes: Friedman... how great an influence on my thought? Let me think who has had more... Smith, Keynes, Summers, Shleifer... I would put Friedman fifth: only four other economist have had a greater influence on how I think... I'm not atypical at Berkeley in finding myself moving under the influence of the intellectual field generated by Milton Friedman--at least, I don't think I am... Friedman as a pragmatic libertarian, perhaps: believing that market failures are atypical, tending to generate profit opportunities and creating institutions to route around them, and that government failure is pervasive--that any expansion of government beyond the classical liberal state is likely to cause more troubles than it solves... Thus a big difference with Arrow, Samuelson, Akerlof, and company: who see market failure as much more common and hard to route around, and democratic governments as much more competent... One problem for us American liberals is certainly that Republican administrations tend to provide excellent demonstrations of Friedman's claim of governmental incompetence/capture/counterproductive behavior--massive government failure that outweighs probable estimates of market failure and creates a...

Posted by DeLong at 12:59 PM

March 21, 2003
In Argentina, Water Privatization Was Good for the Poor

The Economist cites Gallani, Gertler, and Schargrodsky as finding that, in Argentina at least, water privatization was good for the poor. Why? Because the old, national water company was much more interested in being a political patronage network than a water company. The new, private water company saw the opportunity to profit from hooking more people p to the water system--and was constrained by the government to serve the poor as well as the well-off. Economist.com: ...water... privatisation may actually bring benefits for the health of young children.... water services in Argentina are the responsibility of local governments, and that only 30% or so of municipalities chose to privatise them between 1991 and 1999.... Water privatisation in Argentina certainly brought increases in productivity and profitability. The largest privatisation involved the transfer to Aguas Argentinas, a consortium led by Lyonnaise des Eaux, a French company, of OSN, a federally owned entity in Buenos Aires. At the end of the first year, prices for both water use and connection were lower than they had been at the start. Non-payment of bills had been high; by cutting customers off after three unpaid bills, the company got 90% of people to pay. The number...

Posted by DeLong at 03:39 PM

September 14, 2002
Michel Camdessus Is Not a Happy Camper...

Camdessus on Stiglitz http://www.imf.org/external/np/vc/2002/091202.htm Michel Camdessus Responds to Joseph Stiglitz A Commentary By Michel Camdessus, Honorary Governor of the Bank of France Nouvel Observateur Week of Thursday, September 12, 2002 - No. 1975 - Economics In our July 18 issue, the author of Globalization and Its Discontents, a former World Bank Chief Economist, had personally criticized Michel Camdessus, former Managing Director of the International Monetary Fund, in these terms: "In December 1997 in Kuala Lumpur, during a meeting of Ministers of Finance of the G-7 and leading Asian countries, I told Michel Camdessus, then the head (French) of the IMF, of my poor opinion of his recommendations. He replied that for a people to recover economically, "they must suffer..."" The following is Michel Camdessus' response: To confine myself to the facts, I would make the following points: the only G-7 meetings I-but not Mr. Stiglitz-attended in my official capacity at the International Monetary Fund were Ministers of Finance meetings. No such meetings were held in November or December 1997 in Kuala Lumpur. I did stop over for a few hours in Kuala Lumpur in early December 1997 to deliver a speech (the text of which I have located) to...

Posted by DeLong at 03:18 PM

Michel Camdessus Is Not a Happy Camper...

Camdessus on Stiglitz http://www.imf.org/external/np/vc/2002/091202.htm Michel Camdessus Responds to Joseph Stiglitz A Commentary By Michel Camdessus, Honorary Governor of the Bank of France Nouvel Observateur Week of Thursday, September 12, 2002 - No. 1975 - Economics In our July 18 issue, the author of Globalization and Its Discontents, a former World Bank Chief Economist, had personally criticized Michel Camdessus, former Managing Director of the International Monetary Fund, in these terms: "In December 1997 in Kuala Lumpur, during a meeting of Ministers of Finance of the G-7 and leading Asian countries, I told Michel Camdessus, then the head (French) of the IMF, of my poor opinion of his recommendations. He replied that for a people to recover economically, "they must suffer..."" The following is Michel Camdessus' response: To confine myself to the facts, I would make the following points: the only G-7 meetings I-but not Mr. Stiglitz-attended in my official capacity at the International Monetary Fund were Ministers of Finance meetings. No such meetings were held in November or December 1997 in Kuala Lumpur. I did stop over for a few hours in Kuala Lumpur in early December 1997 to deliver a speech (the text of which I have located) to...

Posted by DeLong at 03:18 PM

September 12, 2002
Ken Rogoff on the IMF

Ken Rogoff on the claim that IMF bailouts take the money of rich-country taxpayers, give it to the unworthy, and so create "moral hazard". (He also covers a host of other issues.) Economist.com: ...It would be hard to overstate the influence of the popular perception that IMF crisis loans are thinly disguised bail-outs, with the tab paid mainly by ordinary taxpayers in the industrialised world. The presumed need to limit such bail-outs, and their adverse long-term incentive effects, is a central element of virtually every important plan out there to improve the way the IMF does business. The challenge posed by the bail-out view is not simply lack of transparency—that IMF loans are really outright transfers and should be called such. No, the deeper and more troubling implication is the “IMF moral hazard” theory. Simply put, if lenders are confident they will ultimately be bailed out by heavily subsidised IMF loans, they will extend too much credit to emerging-market debtors at rates that do not reflect the true underlying risk. The result? Bigger and more frequent crises than if the IMF did not exist. Giving the IMF more resources, it is argued, exacerbates the crises it was designed to alleviate....

Posted by DeLong at 02:21 PM

July 02, 2002
IMF Chief Economist Ken Rogoff Unloads Both Barrels in the Direction of Joe Stiglitz

IMF chief economist Ken Rogoff unloads both barrels in the direction of Joe Stiglitz. The "nut" paragraphs are below. I think that, analytically, Rogoff has the better of the particular point he chooses for his argument. Following what appear to be Stiglitz's prescriptions--lend more with fewer conditions and have the government print more money to keep interest rates low--seems that it would have been overwhelmingly likely, in all the cases I know well, to end in hyperinflation or in a much larger-scale financial crisis as the falling value of the currency eliminated every firm's and bank's ability to repay its hard-currency debt and sent the entire country's financial and industrial system into bankruptcy. Stiglitz would have to argue that universal bankruptcy is not that bad: that legal deals would have been quickly struck to write down debts and get the flow of financial intermediation going again. I'm not that optimistic about what happens once the lawyers enter the picture. An Open Letter to Joseph Stiglitz, by Kenneth Rogoff, Economic Counsellor and Director of the Research Department, IMF. Let's look at Stiglitzian prescriptions for helping a distressed emerging market debtor, the ideas you put forth as superior to existing practice. Governments...

Posted by DeLong at 06:32 PM