From “Austerity” to “Growth” – The Politics of Painfully Slow Economic Recoveries

Much to Angela Merkel’s chagrin, international political momentum seems to have rather decidedly swung from “austerity” to “growth”. The transformation had been underway for some time – playing out in debates across the economics blogosphere – but the elections in France and Greece clearly accelerated this evolution. The recent G8 summit communiqué – which leads with the phrase “Our imperative is to promote growth and jobs” – epitomizes the shift.

In terms of our collective understanding of economics and how to fight recessions, I think there’s actually a lot less here than meets the eye, and indeed a lot of rather meaningless talk. To begin with, as Tyler Cowen has pointed out, “austerity” means many different things to different people, and analytically is just not a very useful word. So while the slogan “austerity has failed” might sound good, in reality we a) don’t really know what “austerity” means, b) even if we could define it we don’t really know if it’s been tried or not, and c) even if we could claim it’s been tried we couldn’t really say if it’s failed or not.

On top of this, it’s important to note that “austerity” is a means and “growth” an ends; while “austerity” may never have been a well-defined policy position, “growth” certainly isn’t either. As Gideon Rachman wryly noted, “Mr Hollande says that he will replace austerity with growth. Why didn’t anybody think of that before?” Furthermore, calls for a pivot from “austerity” to “growth” can refer to two quite separate debates, which have tended to become muddled in media discussions. One question is whether current policies are imposing too much suffering and hardship, and if given high unemployment rates and weak economies (and, for some countries, low borrowing costs) new short term, Keynesian stimulative measures should be taken to kick start growth. A second question is what’s the best way for countries to work down their debt-to-GDP ratios, and the argument is that focusing too much on cutting the numerator is self-defeating and countries should instead prioritize growing the denominator, i.e. implementing long-term structural reforms to spur growth, thereby growing their way out of their debts. There’s some overlap between the two – with time the short term becomes the long term – but only some.

While the actual economics of the debate might be overhyped, I do think the rhetorical shift is of considerable political interest, and could have lasting effects. To better understand what’s going on it’s important to step back and look at the big meta-narratives of the crisis response and their political fallout.

The first big response of Western governments to the crisis was bank bailouts/recapitalization programs, which were, by almost every account, massively successful, and also almost immediately hated by the public. Then came a wave of stimulus programs, which I think most economists would also say were by and large successful, and which also quickly became despised by the public (certainly in the US at least, as seen in the 2010 Congressional elections, though I can’t speak as much to their reception in other countries – thoughts on this point from Europeans welcome in the comments). The word “stimulus” now has a clear pejorative tone in American politics, such that no supporter of short term stimulus legislation can actually use the word (hence we get Obama’s “jobs bill”). After stimulus the next response was “austerity”, though again as noted above this has meant different things to different people. And now the people are fed up with austerity.

Notice a pattern? Such is the art of politics during extended slumps; when momentum coalesces around a certain idea as the response to the downturn, and then the economy doesn’t quickly pick back up, yesterday’s solution quickly becomes politically toxic, mostly regardless of whether it was a good policy or not.

And so “austerity” is now on the way out, a fact which will be most obvious when – as has happened with stimulus in the US – even its advocates begin to disown the term. David Cameron might stick to his general small-government vision, but I’m willing to bet he won’t be making many more speeches centred around the theme “The Age of Austerity”; that’s about as likely as Barack Obama running for re-election on the popularity of bank bailouts and stimulus programs.

So will the new “growth” policy have a longer political shelf-life? As long as it stays at such a broad, vacuous level perhaps – it’s hard to imagine the public turning against “growth” as a concept. But if momentum begins to build for a more specific line of responses and Western economies don’t quickly turn around (which, let’s be honest, they won’t), disillusionment could set in once again. Somewhat paradoxically, this actually gives pundits and politicians an incentive to refrain from cheerleading too loudly for the policies they think might actually help, in order to keep public expectations modest and avoid a future backlash. So here’s hoping for some quiet support for infrastructure investment and expansionary monetary policy…

This post also appears on Politics in Spires, the joint Oxford/Cambridge politics and international relations blog.

The World Bank Responds on Chinese Poverty Forecast

In response to my earlier post on the World Bank’s China poverty forecast I received the following reply from the Bank’s poverty team, which (at their request) I am happy to post here in full. Below their response I offer a few further comments.

Thanks for your interest in the World Bank’s poverty estimates and forecasting. As we often have said, these poverty forecasts are only reliable at the aggregated level, not at the individual country level. That’s why we do not normally release country-level forecasts.

That said, the Bank’s poverty team has no serious concerns about the quality of China’s 2008 survey data. Nor do we want to hide our poverty projection for China in 2015.

The easiest way to answer your questions is to show you our estimates. I am attaching the poverty estimates for China here which has exactly the same format as the GMR 2011.

Please notice that China conducts rural and urban household surveys separately. The national poverty estimates are the population weighted average from rural and urban poverty measures. China’s National Bureau of Statistics will soon release new urban population share from the 2010 census, and the time series of urban population share between 2000 and 2010 will also be updated. So, too, will the World Bank’s poverty estimates for China. But as of now, these are our best estimates.

Your blog said that “the most recent poverty survey for China, which covers the year 2008, has been the subject of considerable rumours in the past. Specifically, there was quite a long delay from when many people thought the results would be released to the public until when they actually were, which was just a few months ago.”

That is simply wrong. The delay in the public release of the World Bank’s poverty numbers had nothing to do with China. Rather, it was due to delays in the access of the data for a number of countries in Africa.

Sincerely,

Shaohua Chen
Senior Statistician
Development Research Group
World Bank

 

First off it’s great to have the World Bank respond on these issues, and especially great to respond by sharing the data. It’s still not particularly clear to me why the China projection was left off of the official publication this year; if the China story is interesting and important enough to merit its own line on the table – as I certainly believe it is – and the Bank has faith in the projection, then surely the 2015 figure should be included in the table, rather than listed as “not available”. But in any case, it’s great to now have the figures.

And indeed I’d argue it’s particularly important to highlight the China figure as it’s seen a rather substantial revision; last year the Bank thought in 2015 there would be just 66 million Chinese living in poverty, and this year that projection has risen to 100 million, a 50 percent increase. That’s an important change, and one that deserves to be discussed. Personally my guess is that it’s far too high, and that several years from now when we have the full data the actual 2015 figure will be considerably lower; time will tell. (Incidentally, it’s possible the 100 million figure is about right as an “expected value” prediction rather than a baseline prediction, in the sense that there are multiple possible equilibria for China’s future, including some unlikely-but-possible ones involving a hard landing, where poverty stops declining altogether or potentially even increases. So there’s a high (baseline) probability there will be fewer than 100 million Chinese living in poverty in 2015, but a small probability there will be much more, which could balance out to something like 100 million. But that’s not how people usually think about poverty projections.)

Finally, one small point of clarification: in the original post I did not mean to suggest that the China data was the reason for the delay of the overall new poverty results released earlier this year, but rather just that there were delays with the China data itself, such that China was not included in the April 2011 Povcal update…

Is the World Bank Deliberately Hiding its China Poverty Forecast?

I want to preface this post by saying that by nature I’m not a conspiracy theorist. But it seems to me that there is something funny going on with the World Bank’s efforts to monitor and forecast poverty in China.

I’ve done some work on poverty forecasting in the past, so I’m always excited to see when the World Bank, the official voice on such matters, puts out new forecasts. Last month the Bank released its Global Monitoring Report 2012, which includes its latest estimates of poverty for the year 2015. Here’s the relevant table:

When I first read this table my eye immediately focused in on the “—“ for China in 2015, which I initially took to mean the Bank believed $1.25 poverty would be effectively eliminated by then. While this would be an optimistic forecast, it actually doesn’t sound that crazy to me; after all, the World Bank’s China office (which, importantly, I believe operates mostly independently of the poverty team) wrote all the way back in March 2009 [PDF] that “extreme poverty, in the sense of not being able to meet the most elementary food and clothing needs, has almost been eliminated in China.”

But when you look at the bottom of the table, you see that “—“ actually means not available, rather than effectively zero. The obvious question, then, is why isn’t it available? Since we’re talking about forecasts, this can’t be a “data availability” issue in the strict sense of the term, because of course none of the data is actually available; these are the Bank’s best guesses at what poverty will be in 2015. So why isn’t there a guess for China?

The fact is there is a guess for China – there has to be – the Bank just won’t tell us what it is. And not only will they not explicitly tell us what it is, but they’ve gone out of their way to ensure we can’t calculate it ourselves.

We can be sure that there is a China estimate simply by noting that there’s an estimate for the East Asia and Pacific region as a whole; China accounts for about two thirds of the region’s population, so obviously it’d be impossible to guess how many poor people there’d be in the region without having a pretty good guess as to how many poor people there’d be in China.

Even more intriguingly, however, look at the bottom two rows of the table; the Bank gives a 2015 estimate for “World”, but the figure for “World excluding China” is once again “not available”. Note that logically this makes very little sense; if the figure for China were truly “not available”, then the Bank should be able to estimate “World excluding China” but not “World”, not the other way around. So why is the figure for “World excluding China” “not available”? Is it because if it were available we’d be able to work backwards and calculate the Bank’s 2015 forecast for China, which for some reason it doesn’t want to reveal?

One face-saving explanation would be if somehow the Bank’s model for producing these results truly only produced regional data, i.e. if the regional figures didn’t represent aggregates of national data (or aggregates of the big countries plus some residuals), in which case there wouldn’t be any “China” figure to show. But I’m sceptical of this for a number of reasons. In order of increasing conspiracy-ness:

One, it would just be a strange way to forecast poverty. While you maybe wouldn’t include every country in the world when you want to be able to add up to a global aggregate, whatever form of model you’re using can surely handle more than the six regions the Bank divides the world into, and the more fine-grained you get the better. And you’d certainly want to have specific data for China and India, as these two countries drive the global picture (and both have some controversial issues concerning their poverty counts, so it’s important to be able to speak about them specifically). And the source says ‘World Bank staff calculations from PovcalNet database’, and the PovcalNet database definitely builds regional aggregates by summing national data.

Two, in earlier editions of the Global Monitoring Report there’s always been a figure for China in 2015. Here’s the relevant table from the 2011 report:

So last year the projection method clearly allowed the Bank to forecast 2015 poverty in China; why not this year?

Three, and this is where we get to the most conspiratorial part – and admittedly most speculative, but of course what is a blog for if not wild speculation: the most recent poverty survey for China, which covers the year 2008, has been the subject of considerable rumours in the past. Specifically, there was quite a long delay from when many people thought the results would be released to the public until when they actually were, which was just a few months ago. Rumours from within the Bank suggested that the Chinese representatives at the Bank were being very secretive with the data, did not want to grant many people access to the raw data, and were deliberately holding up its public release. I don’t think I’ve ever seen anything written on this, so take it with a grain of salt, but I know a number of people who care about poverty data who spent a long time waiting to learn the results of the last China survey…

What are we to make of all this? My guess is there are two possible stories going on. One is that the poverty team within the Bank just doesn’t have enough faith in its China data to be willing to publish a specific forecast for the country – perhaps because of some of the well-known problems with the country’s PPP exchange rate estimate, or perhaps because of some issues with the 2008 survey, or something else. On the one hand this makes some sense – when you’re aggregating national forecasts into regional forecasts you have some room for errors to cancel each other out, and it’s easier to have more confidence in the broader picture than in the narrow one. But on the other hand, China’s a huge country; if we don’t have confidence in the China national data, then why would we have any confidence in the East Asia and Pacific regional data? And, perhaps more to the point, why in the 2011 GMR could the Bank feel confident enough to put out a 2015 forecast, but a year later it doesn’t?

The second possible story is more sinister: that there is some deliberate effort to keep Chinese poverty data and estimates from being released to the public. Did the poverty team within the Bank produce a figure for China – they almost certainly did – but someone else within the Bank decided this wasn’t the “right” number, and so didn’t want it published? Was there originally a number on the China line, but somewhere during the editing process it was crossed out? I know that sounds kind of crazy, but poverty data can be easily politicized – just ask India. I’d hope the Bank would be able to keep these political issues to a minimum, but it is of course not immune to political pressures, both internal and external.

The funny thing is, the Bank could have rather easily avoided this issue by simply eliminating the China-specific rows from the table; it almost seems as though they’re going out of their way to say “we have an estimate for China but we’re not going to tell you what it is”. Just what is going on here? Maybe there’s a good, logical explanation for all of it – and I hope there is – but right now I don’t see it…

UPDATE: See a response from the World Bank here.

France and the New Balance of Power in a Crisis-Stricken Europe

So the main reason I’ve been neglecting my blogging duties of late is because I’ve been preoccupied studying for an exam on international relations theory and history. With the exam safely behind me I’m back to blogging, but still have academic IR debates on the mind, so today I want to write about what the history of early 20th century European relations can tell us about the continent’s current political economy.

To grossly oversimplify, back in the pre-WWI days Europe was controlled by a number of Great Powers of roughly equal strength, who were in continual competition with one another to run the world. They typically pursued their goals by forming loose and shifting alliances; whenever any one state seemed to be getting too strong, a collection of the others would team up to balance against it (hence the “balance of power”). Britain, which then as now prized its position as being of but not in Europe, considered itself the ultimate balancer, frequently weighing in against the strongest continental power to ensure no state could establish hegemony over the mainland.

Now fast-forward to the Europe of today, as the debt crisis stretches into its third year. Of everything that has been written on the Euro crisis so far, I think one of the most perceptive and insightful pieces was an op-ed by Anne Applebaum all the way back in September 2010 (doesn’t that feel like a long time ago?), which made one simple but important point: thanks to the crisis, the East-West divide, which had dominated intra-European relations since at least the end of World War II, has now been overtaken by the North-South divide. The “North” – represented by Germany, Scandinavia, and some Eastern European economies like Poland and Estonia – are ruled by budget hawks committed to fiscal discipline; the “South” – including Greece, Portugal, Spain, Italy, and perhaps Bulgaria and Hungary – are home to bloated public sectors and seem unable to get their public finances under control. The geography doesn’t match up perfectly, of course, and it’s easy to argue about which countries belong on which side, but the fundamental divide is hard to ignore. And while the two groups aren’t anything like formal alliances, the economic interests within each group are more closely aligned than those across the divide, and hence it’s easy to imagine the major disagreements about how to manage the European economy over the coming years falling more or less along this fault line.

As Applebaum noted at the time, “France floats somewhere in between”. I think this means that France is positioned, if it wanted to, to play something like the role Britain played 100 years ago, able to weigh in – perhaps decisively – on the side of either the North or the South. The analogy isn’t watertight – Britain’s role as balancer was based in its fundamental strength, whereas for France today it’s more about being considerably weaker than Germany but aspiring to be viewed as its neighbour’s equal. (Which, incidentally, is another theme that reappears throughout European history…) But still, in the new North-South Europe France could represent the crucial swing vote, and throw some political clout behind the interests of the South, preventing Germany from fully setting the economic agenda for the continent.

In any case, up until now France has clearly sided with the North, epitomized in the “Merkozy” romance. But as the French prepare to head to the polls it appears increasingly likely Sarkozy is on his way out, which could dramatically shake up the picture. From many of the campaign statements he’s made to date, it seems at least possible a Hollande government would rupture the informal Franco-German alliance and move the French into the “South” camp. (It’s worth noting that I’m not particularly talking about whether Hollande would actually harm the French economy and investment culture, as some seem to fear, but rather whether France will continue to stand behind Germany in intra-European political economy battles or rather take up the cause of the Southern nations.)

To bring back some academic IR terms, the impetus for such a transition can be understood in both realist/materialist terms and constructivist/identity terms. From a realist point of view, it could be that France’s interests no longer lie with the Northern interests of tight money and imposed austerity. From a constructivist point of view, it’s easy to imagine the French self-identity under Hollande evolving from Germany’s little brother to the champion of the downtrodden South. As these two forces interact, I don’t think it’d be that surprising to see France pivot from backing up Germany to balancing against the strongest power on the continent, and challenging the Germans on their vision for the future of the European economy.

Over the past several months the Eurozone has entered a strange period of stasis, what has effectively become a period of permanent crisis. Since the crisis first erupted pretty much every policy measure adopted has been an effort to “buy time”, but nothing’s really been accomplished with this time, and so nothing’s really changed. There aren’t a lot of ways to break out of this status quo; you could have some sort of surprise, disorderly default from a periphery economy, but no one really wants that outcome (though I’m starting to think it might be better than continuing down the current path). One thing that could really shake up this political equilibrium, though, would be if France decidedly announces that it no longer supports the current Northern establishment position of forcing austerity on the South.

I’m not saying this necessarily will happen, or even that it’s particularly likely to. But I definitely think it’s a storyline worth watching, and a reason we should all be paying close attention to the upcoming French election…

File Under “Austerity Doesn’t Work Without Political Buy-in”

So it turns out the Greeks aren’t the only ones capable of skirting austerity-friendly legislation, driving a wedge between de jure and de facto fiscal tightening. The latest from Ireland (via NYT):

DUBLIN — Anti-austerity protesters are claiming victory after the government acknowledged that around 50 percent of Ireland’s estimated 1.6 million homeowners failed to pay a new, flat-rate $133 property tax by the March 31 deadline. [...]

Introduced on Jan. 1, the household charge was intended as a forerunner to a comprehensive property tax next year. It has become a lightning rod for widespread disenchantment on an assortment of issues like cuts to services, findings of political corruption, taxpayer liability for debts to private banks and even European legislation intended to enhance wastewater treatment from septic tanks. [...]

The Irish government argues that it has no choice but to introduce the interim tax at the behest of its lenders and has vowed to identify and prosecute those who have refused to pay.

“We will begin with sending out letters and then escalate it from there to the maximum fine of 2,500 euros” — $3,330 — “on top of the outstanding amounts due in late fees and interest,” a spokesman for the Department of Environment said in an interview on Monday. “We will be taking people to court if necessary, and if there is refusal to pay, then that could be seen by a judge as contempt of court.”

That last sentence hints at the hidden costs of unpopular austerity programs, in the form of compliance costs. How much does it cost to have a judge make a ruling on whether a failure to pay a small fine is a contempt of court? I’d imagine pretty high, undoubtedly way way too high to have anything like half of the population held in contempt.

Obviously the government’s plan isn’t to hold half the population in contempt, but rather to turn up the social pressure in hopes of getting people to come forward and pay themselves  (though it’s worth noting that even this can come at a pretty high administrative cost, just in terms of keeping track of who’s paid, finding those who haven’t, etc). Maybe this will work, but I’m not too optimistic, especially for the Irish. Other peripheral economies with deep structural problems can (somewhat) convincingly spin a story of the need for shared sacrifice for the national good. But the Irish for the most part have a reasonably well-functioning economy, and are being asked to swallow deep-cutting austerity simply to pay off the misguided 2008 all-encompassing bank guarantee, much of which went to pay back foreigners. That’s a tough sell.

Leslie Chang on Respecting the Preferences of Chinese Workers

As a quick follow-up to the earlier discussion about Foxconn factories and Chinese workers, Leslie Chang has a fantastic brief piece up for the New Yorker on the perversity and egoism of American consumers thinking they know what’s best for Chinese workers. Key quotes:

The simple narrative equating American demand and Chinese suffering is appealing, especially at a time when many Americans feel guilty about their impact on the world. It’s also inaccurate and disrespectful. We must be peculiarly self-obsessed to imagine we have the power to drive tens of millions of people on the other side of the world to migrate and suffer in terrible ways. China produces goods for markets all over the world, including for its own consumers, thanks to low costs, a large and educated workforce, and a flexible manufacturing system that responds rapidly to market demands. To imagine that we have willed this universe into being is simply solipsistic. It is also demeaning to the workers. We are not at the center of this story—we are minor players in theirs. By focussing on ourselves and our gadgets, we have reduced the human beings at the other end to invisibility, as tiny and interchangeable as the parts of a mobile phone. [...]

Chinese workers are not forced into factories because of our insatiable desire for iPods. They choose to leave their farming villages for the city in order to earn money, to learn new skills, to improve themselves, and to see the world. And they are forever changed by the experience. [...]

Across China, there are a hundred and fifty million migrant workers, a third of them women, who have left their villages to work in the factories, restaurants, hotels, and construction sites of the cities. They represent the largest migration in human history; their experiences have changed the way they work and marry and live and think. Very few of them would want to return to the way things used to be. Should you feel bad? I don’t think so. But whether you do or not is peripheral to a much larger and more important story.

It’s worth giving the whole thing a read.