Tom Pepinsky

Category: Economics

  • Why Greece 2015 is Not Indonesia 1997

    The Iconic Image of IMF Power: IMF Managing Director Michel Camdessus looking on as Indonesia's President Soeharto signs a second bailout agreement, January 1998
    The Iconic Image of IMF Power: IMF Managing Director Michel Camdessus looking on as Indonesia’s President Soeharto signs a second bailout agreement, January 1998

    Yesterday, Joseph Stiglitz argued that Greeks should vote “no” on the upcoming referendum to accept or reject the troika’s terms. In response, noted Indonesian scholar and public figure Ulil Abshar-Abdalla tweeted this:

    Well, Stiglitz was a forceful critic of the IMF right after the 1998 Asian Financial Crisis. As he wrote in the New Republic in 2000:

    I was chief economist at the World Bank from 1996 until last November, during the gravest global economic crisis in a half-century [the Asian Financial Crisis, to which Ulil is referring]. I saw how the IMF, in tandem with the U.S. Treasury Department, responded. And I was appalled.

    But Ulil’s point does raise interesting questions. Indonesia’s years of IMF-managed adjustment and austerity were extraordinarily painful. Greeks today have a choice between austerity and autonomy. Shouldn’t we learn from Indonesia’s experience—and the experiences of other countries like Indonesia that have endured painful austerity and adjustment measures—to recommend against the austerity path?

    I would not go so far, because Greece 2015 really is different than many of these previous cases, in two key respects.

    The first difference is the biggest one: the currency union between Greece and the other Euro members is a political project. Europeans have shown themselves to be incredibly tolerant of austerity for the sake of maintaining the Euro, because the Euro is not simply a very hard peg of the Greek currency to all the other currencies of the Euro area. Leaving the Euro is not the same as a devaluation of the rupiah versus the dollar, because it requires both (1) a strong and nimble Greek monetary authority to create a new currency overnight, and (2) an abandonment of a “certain idea of Europe.” That idea that may have once been held by only an elite minority, but today is widely shared, it has real political meaning, and the Euro currency itself is part of that. Even in Greece.

    The second big difference between Greece 2015 and many of the Asian cases—especially Indonesia and Malaysia—is that Greece today is a democracy. This matters at a fundamental level for understanding what policies get made and why (as I argue here). Indonesia’s crisis was so bad for so long in part because the outgoing Soeharto regime struggled mightily not to implement some of the least controversial aspects of the IMF’s adjustment packages.* In Malaysia, the counterfactual case of the country that rejected the IMF and managed to withstand the crisis fairly well, authoritarian stability was a prerequisite for making the difficult decisions associated with heterodox adjustment. The politics, the patronage, and the public outcry along the way were supremely ugly. Greece today cannot count on the strong-arm tactics of a Mahathir Mohamad to keep domestic politics in line. Nor does it need to fear the unabashed kleptocracy of an aging sultanistic dictator. For better or for worse, Greece may look instead to South Korea, a democratic regime whose IMF-mandated rescue turned out to not be quite so bad.**

    Does the fact that Greece 2015 is not Indonesia 1997 mean that Greeks should vote to accept the troika’s terms? Not at all. It does, however, help to illustrate just how unique the current Greek situation is. Yes it is true that once again, a small open economy faces a choice between austerity and autonomy, with substantial long-term risks for the very core of its national economy associated with both choices. The austerity package is stark, perhaps unimplementable, and yet to label Greece’s choice in between austerity versus democracy is too facile. I do see a strong argument, however, for greater Europe to shoulder more of Greece’s adjustment risk than it currently does.

    Alexis Tsipras and Jean-Claude Juncker: Still friendly after all these months
    Alexis Tsipras and Jean-Claude Juncker: Still friendly after all these months?

    NOTE

    * Like the plan to abolish rotten son Tommy Soeharto‘s monopoly on clove marketing and exports.
    ** If you would have told me in October 1997 that by October 2012 I’d be listening to “Gangnam Style” and installing a Samsung refrigerator…

  • Ethnography and Institutions for Development Policy

    Chris Blattman recently posted a powerful argument that as development policy, skills training is a bad investment. There is just very little evidence that it is effective.

    From 2002 to 2012 the World Bank and its client governments invested $9 billion dollars across 93 skills training programs for the poor and unemployed. In lay terms, that is a hundred freaking million dollars per program.

    Unfortunately, these skills probably did very little to create jobs or reduce poverty.

    Virtually every program evaluation tells us the same thing: training only sometimes has a positive impact. Almost never for men. And the programs are so expensive—often $1000 or $2000 per person—that it’s hard to find one that passes a simple cost-benefit test.

    In a much longer discussion paper, he and Laura Ralston call for more research, and for a greater focus on capital-based programs and the potential for complementarities with skill-based problems. In short, rather than train people to do something, either give them money to buy something, or build them something yourself. And then maybe see if skills training them helps even more.

    Like any good paper by any self-respecting social scientist, one of their main recommendations is for more research that they and their students do. More evidence, more micro-pilots, more multi-country interventions to learn about context. I agree. But in the spirit of Chris’s invitation for “discussion, and comments and criticisms” let me suggest a role for more ethnography and more institutional analysis.

    It always strikes me how different the view of (say) the World Bank is from that of the local entrepreneur, laborer, or mother who works at home. My immediate thought when I hear that any individually-targeted development intervention has failed is “well, could it have succeeded?” In other words, does the intervention manipulate a binding constraint for an individual or household? The point is not that I’m sure that all interventions fail to do so, but rather that I rarely have good reason to suspect that they will. The suggestion that follows is to learn more about how individuals and households make decisions in the local contexts in which they live their everyday lives. Find out what those constraints are, and then try to push on those. The people who know how to learn about those everyday constraints are trained in ethnography—and I mean serious ethnography, the kind that involves languages and staying outside of a hotel.

    A focus on institutions implies a different direction. Everyone agrees that institutions are important, but the cutting edge in development economics and related parts of political science focuses elsewhere. Why? Because institutions aren’t manipulable, their features bundle lots of treatments, core concepts remain tremendously fuzzy (try defining governance, for example), we don’t seem to have learned a lot from decades of studying them, and the potential for disaster from bad institutional design is just enormous. Yes. But I don’t see a way around taking formal and informal institutions seriously in development policy. It is not true that variation in development outcomes is purely a function of individual characteristics aggregated to the region or country. Context is not reducible to individuals, and institutions are part of that context. Learn about these institutions, both formal structures and informal practices and conventions, even if they aren’t manipulable. Even descriptive knowledge about institutions can be immensely valuable.

    So that’s my suggestion. Want to design better policy? Think both smaller and bigger. Understand local constraints (small) and institutions (big). Both of these things imply that there is knowledge out there that is useful, yet non-experimental in nature. By implication, effectiveness of interventions depends on factors that cannot be manipulated as part of an intervention’s design, but which should guide implementation and cost-benefit calculations anyway. I find it hard believe that anyone would disagree with these ideas—to me, my comments in this post are almost platitudes, they are so mild—but it is still worth saying them explicitly.