Archive for February, 2012

Did the German Finance Minister Seriously Just Suggest Greece Postpone Elections?

I didn’t think it was possible, but the situation between the Greeks and the Germans just grew considerably more ridiculous. German finance minister Wolfgang Schäuble said in a radio interview that the Greeks should postpone national elections planned for April and instead adopt a technocratic government that leaves out the country’s major political parties (h/t Tyler Cowen, who correctly files this under ‘Department of Yikes’, and it’s worth noting that the Finns and the Netherlands are also apparently on board with this plan).

Good lord. Due to the Eurozone crisis a lot of things which would have seemed unthinkable a few years ago are now plausible, but even by our new 2012 standards this is just insane. Suffice it to say, the German finance ministry should not be in charge of determining whether Greece is a democracy or not! A situation where the Greek people want to choose their own government and the German finance ministry tells them they cannot is completely untenable. For anyone who forgets their European history, the response from Greek President Karolos Papoulias was a not-so-subtle reminder: “[W]e cannot accept insults from Mr Schäuble. Who is Mr Schäuble to insult Greece? … We have always defended not only the freedom of our own country, but the freedom of Europe.”

What’s particularly bizarre is that the current fight comes down to the Germans demanding various Greek politicians sign letters saying they’ll stick to austerity after the next election, and not all the politicians are happy about it. For the life of me I don’t understand why the Germans care about these letters. It’s clear that Greek politicians have a problem credibly committing to undertaking wide-sweeping austerity measures, and for good reason – their people don’t want them, and austerity without political buy-in doesn’t really work. But how are signed letters supposed to solve that problem? What magical powers are these letters supposed to have?

The most logical explanation is probably that, like with the call to impose a budget commissioner a few weeks back, this is ultimately another attempt by the Germans to accelerate the Greek endgame. Both the Germans and the Greeks seem to be inching toward the realization that they could live with Greece outside of the Eurozone, at least relative to other available alternatives. The simple fact is, real relative wages in Greece need to fall a lot if the Greek economy is going to sustainably grow again. This can happen one of three ways: through Greek nominal wage cuts (which the Greeks can’t accept), through high Eurozone inflation and stable Greek nominal wages (which the Germans won’t accept), or through Greece getting control over its own currency, which will depreciate considerably relative to the Euro. It increasingly appears the only question left is how to get to the latter option with minimal collateral damage to the European banking system.

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

The Race for the World Bank Presidency is On – Will it be an Open Competition this Time?

Earlier today Robert Zoellick announced he would be leaving the World Bank at the conclusion of his five year term as President at the end of June. The news shouldn’t come as a surprise; in the history of the World Bank only two Presidents – Bob McNamara and Jim Wolfensohn – have survived for more than a term, and there was no particular reason the Obama administration would keep a Bush appointee around when they didn’t have to. Zoellick leaves a mixed legacy – he brought some much needed stability to the Bank after the fiasco that was the Wolfowitz Presidency and did a good job quietly raising money from rich countries. But he never showed particular leadership or foresight on where the Bank fit into a 21st century global economy, always seemed a step behind in responding to the financial crisis, and, at least by my count, holds considerable responsibility for blowing the food price “crisis” out of proportion. (That last point is perhaps not widely shared, but I think the whole narrative of a food price crisis – which was driven by the Bank and a number of aid advocacy groups like Oxfam – is mostly wrong. But that is a post for another day.)

It will be very interesting to see if Zoellick’s announcement kicks off a real campaign to choose his successor. As we all knew this was coming, I’d been surprised how quiet this front had been to date. Other than the long-standing rumours of Hilary Clinton eyeing the job, there’s been very little written on who wants to be in the running, and particularly on the critical twin questions of how hard the US will fight to hold on to its long-standing privilege of picking the President and how much of a fight the developing world will put up to get their own candidate in. When Strauss-Kahn was leaving the IMF there were huge debates over who would take his place, and specifically whether the tradition of allowing Europe to choose the Fund’s top position should persist. So why has there been such little debate so far, and how come those of us (myself included) who want to see developing countries given bigger stakes in the Bretton Woods institutions aren’t making a bigger fuss this time around?

One possible reason is that many people (probably correctly) see the Fund as having more power than the Bank in the world today, and so there are higher stakes over the rights to name its head. But it’s worth noting that the best chance for breaking Europe’s lock on the Fund is by first ending US control of the Bank Presidency. The current situation can only persist so long as the US and Europe stand behind each other and both tacitly agree not to rock the boat (or, to switch the metaphor up a little, to keep everyone else off the boat). If it’s true that the Fund Managing Directorship is a more politically powerful position than World Bank President, it stands to reason that Europe will fight harder to hold on to it than the US will fight for the Bank Presidency, and thus the Bank Presidency is an easier target. And once the US has given up its right to name the head of the Bank, it will undoubtedly side with the rest of the world against the Europeans next time the Fund MD position is open.

But putting all that aside, for those of us who care a lot about the World Bank, ensuring the organization has a legitimate and effective President is an important goal in its own right, regardless of its potential instrumentality in bringing down Europe’s claims on the Fund. So it’s time to start making a push for the Obama administration, and specifically Lael Brainard, the undersecretary of international affairs at the Treasury Department who has been tasked with drawing up a list of potential candidates, to do the right thing and open the competition up. The administration claims (genuinely, as far as I can tell), to really care about development, but, for well known reasons, doesn’t have a lot of money to spend these days. Here’s a chance to do something that will actually make a difference at zero cost, and they should jump on it.

Which non-Americans might be a good fit? A few names come to mind initially. One is ex-Brazilian President Lula da Silva. Or Ngozi Okonjo-Iweala, who’s been in-and-out of Nigeria’s government and also spent time in senior positions at the World Bank. But my favourite choice is probably Sri Mulyani Indrawati, the former Indonesian Finance Minister who’s currently one of three #2’s at the World Bank. On substantive grounds, she knows finance and did a remarkable job guiding Indonesia’s economy through difficult but necessary reforms that paid off, including tackling widespread corruption, always an issue on the Bank’s radar. On symbolic – but still important – grounds, she’s a woman, from the world’s most dynamic region (Asia) and is from a large but not dominant developing country; one can imagine the Chinese blocking an Indian appointee and the Indians blocking a Chinese, but both being able to get behind an Indonesian. (Turkey’s Kemal Dervis benefited from a similar dynamic in his aborted bid to replace Strauss-Kahn at the Fund.) So if anyone  with any clout is reading this (like Andrew Sullivan !!), let’s get the campaign underway…

The Greek Structural Adjustment Programme

Taking a step back from the immediate uncertainty over Greece (see here for the latest updates), I’m struck by how similar the situation is to the old IMF and World Bank Structural Adjustment Programmes (SAPs) of the 1980s and ’90s. Reading accounts of the negotiations (especially this one in the Times today about how the Germans, IMF, and ECB don’t trust the Greeks), you could rather easily replace “Greece” with “Nigeria” or “Senegal” and be transported back in time 20 years. An emergency need for new official lending to roll over past debts? Check. Tough loan conditionality attached? Check. Domestic pushback and questionable democratic legitimacy? Check. It’s all playing out more publicly/more quickly in Greece today than in sub-Saharan Africa 20 years ago – maybe because the power imbalance isn’t quite as large, so Greece has more room to manoeuvre – but the fundamentals are remarkably similar.

Now I’m actually someone who thinks history has judged the SAPs a bit too harshly, and that the economics of the Washington Consensus – if not the politics or the implementation process – deserve at least some credit for the great boom being seen across the developing world over the last decade. But even still, it’s pretty clear SAPs didn’t work all that well, mostly because there was never domestic political buy-in and hence little follow through on reform programmes. You don’t need to accept a narrative of the World Bank and IMF as being out to exploit the poor to have a problem with this; from a pure positivist/rationalist perspective, SAPs didn’t do a good job of meeting their stated goals.

Coming back to Greece today, the lesson is simply that imposing austerity from outside – no matter what you think about democratic legitimacy – just generally doesn’t work very well. Over the past couple days there’s been ample media coverage painting the current situation as “will the Greek coalition sign on to the deal or not?”, with the implication that the critical question is whether a deal is agreed, that’s what will rally the markets, etc. To me this largely misses the point. I think the historical lesson from the SAPs is that the deal itself is of very little value, it’s the follow through that counts. And a loan agreement that imposes structural adjustment against the wishes of the domestic political class (not to mention the people) is barely worth the paper it’s written on, and is certainly a very poor predictor of what policy changes we’ll actually see over the coming years.

There’s a chance that the next few days will see the situation in Greece unravel if negotiations completely fall apart. But we should be honest that there’s no real chance of anything being “resolved” if a deal is agreed. And in fact, I’d even say that if the Greeks sign on to a deal that clearly lacks domestic legitimacy, the likelihood of the country’s finances being a mess two or three years from now probably only increases…

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

Puzzles of Management Consulting

So this post is a bit outside the normal scope of this blog, but Robin Hanson has a couple of interesting posts up on the puzzle of management consulting which dovetail nicely with something I’d been thinking about of late, so I thought I’d take the opportunity to quickly put it out there; after all, the euro crisis will still be there tomorrow…

The puzzle Robin addresses is why firms pay so much to hire management consultants, when what they’re getting is advice from a bunch of (admittedly very smart) kids just out of college who don’t know anything about their industry; surely there must be cheaper ways to get better advice. Robin’s answer is essentially that firms are crippled by dysfunctional internal politics / principal-agent problems, whereby even when there are clear reforms which are known to benefit a firm, powerful actors within the firm who would lose out from the reforms are able to block them. By bringing in the outside “expert” opinion of very prestigious management consultants, a reform-oriented CEO can shift this political balance and overcome blocking coalitions. (Side note: would accepting this frame change how you view the Monitor Group / Qaddafi scandal?) Management consultants thus trade primarily on their prestige, which in turn is cultivated by hiring smart pretty kids from very prestigious colleges. Like picking what university to go to, it’s all about status and signalling.

Which brings us to the puzzle I want to talk about. Like lots of other students unsure of what to do with their futures, I’ve been shopping around some career centre events of late, including a few recruitment nights put on by the big management consulting companies (which, I’ll add up front, I’ve decided I don’t particularly want to do…). But in any case, what struck me most about these events is how expensive they must be to put on: renting out a nice space, food and drink for all the students who show up to listen to the pitch, not to mention the time of the consultants who are there to serve as recruiters. Aren’t we supposed to be in an (almost) recession? It would seem all but impossible to justify these expenses based on the outcome: at the end of the day each company is going to hire maybe a handful of people, so why are they wining and dining dozens? It seems hard to believe the marginal quality of successful applicants is going to fall much if they cut back on the drinks a little, or had only five employees present to sing the firm’s virtues rather than fifteen. (And with the average lifespan of an employee at something like 2 years, it’s also not like they should be that afraid of getting stuck with sub-optimal workers who will be around forever.) Shouldn’t one of these consultants be able to look at this situation and realize it’s a waste of money, that there must be cheaper ways to get the same quality of recruits?

But then I realized that thinking of the cost of these events as coming out of the “recruiting” budget is probably the wrong way to think about, because really it’s as much or more about advertising, or, in Robin’s terms from above, cultivating status. Sure, the management consulting companies want to find a handful of smart kids to work for them, but they also want to impress as many smart (or perhaps even more to the point well-connected/well-positioned) kids as they can, so that when those kids grow up to be running their own companies they’ll have a favourable impression of consulting as an industry in general and of their particular company in particular, and hence more likely to become a client. Hell, if they can talk you into applying and then reject you, all the better; “Of course those McKinsey/BCG/etc/etc folks must be brilliant, even I wasn’t up to their high standards!” All of which serves to cultivate social facts about the skill/expertise/brilliance of these companies, which then confers upon them the status to come in and effectively tilt the scales in internal political disputes within a firm, which allows them to earn their outrageous fees…

As a final note, I’ll also echo Robin’s earlier observation about the bizarre, disproportionate attractiveness of the management consulting industry as a whole – seriously, I don’t think there was a single overweight person at any of these events. I’m not sure if as potential applicants you’re supposed to find that appealing, but I definitely found it much more disconcerting. Are we supposed to want to work at Gattaca??



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