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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.

Foxconn Factories, Sweatshops, and the Revealed Preferences of Chinese Workers

So it turns out that the much-lauded This American Life story from a few months back about working conditions in the Foxconn factories in China which produce Apple products was factually flawed. While there weren’t outright lies, exactly, there was certainly some coloring/blending of the truth, enough so that TAL is retracting it, a first for the program. This is of course embarrassing for TAL, but I’m also somewhat sympathetic to the defense put forward by Mike Daisey, who developed the piece: the story was originally created for his Off-Broadway one-man show, which obviously has much lower standards for factual accuracy than journalism, and he never particularly claimed to be a “journalist” anyways.

In any case, I actually think there are much bigger issues with the story other than some factual fibs, which have to do with the general approach of how it is framed (some of which Matt Yglesias touches on here). It’s of course true that working in one of these factories isn’t the best of all possible worlds. But if we’re going to be bemoaning the terrible conditions in Chinese manufacturing, we need to be clear about in comparison to what. When most Westerners hear about the hard lives of factory workers in China, I think they implicitly are comparing it to the employment opportunities and circumstances in their own societies. And they, quite understandably, think they’d never want that kind of job. But that of course is the reason why these jobs aren’t in America but are in China, a much much poorer country, where the other opportunities available for workers aren’t any better, and are often noticeably worse.

Chinese factories offer long hours, low (by Western standards) pay, and tough physical conditions. And yet there’s still huge demand from Chinese laborers wanting to move from rural to urban areas to seek these kinds of jobs. Indeed, when a new Foxconn factory opened in January, thousands of people lined up for a chance at a job. If we take the idea of revealed preferences seriously, it’s clear that Chinese workers think these jobs are better than the alternatives available to them, which for many of them is back-breaking work on low productivity, subsistence farms.*

To come back to last week’s discussion on misplaced Western advocacy efforts, I’ve long been at best ambivalent about anti-sweatshop campaigns, which were huge a decade-plus ago, then mostly died out, and now are somewhat coming back in the form of these Foxconn and other similar stories. It’s possible, under certain targeted circumstances, for Western pressure and the leverage of Western markets to be used to improve labor conditions in developing countries – the best example of this is probably the US-Cambodia textiles agreement, which allowed Cambodia the opportunity to increase its quota share of the US textile market by voluntarily increasing its labor standards. But to the extent that broader anti-sweatshop campaigns served simply to lower demand for these goods in Western markets and hence put some of these factories out of business, they probably did more harm than good. It’s easy to complain about workers being “exploited by the global economy”, but the fact is, in the absence of opportunities presented by the global economy, these workers could just as easily be exploited by the local economy, probably to much worse – if less visible – effect. There’s a reason so many millions of Chinese laborers want to get off the farm and into factory jobs, even when the conditions in these jobs are shockingly bad to Western societies. Advocacy efforts aiming to help the world’s poor shouldn’t be trying to stop them.

* It’s worth noting that this argument doesn’t apply in circumstances where the jobs don’t actually represent revealed, informed preferences, i.e. if workers are forced to work against their will, are cheated or lied to by their employers, or are too young to make an informed decision about where and whether to work. Thus the case for a basic set of universal labor laws proscribing practices such as slavery and child labor.

KONY 2012, Conflict Minerals, and the Problems with Simple Advocacy about Complex Issues

In something of a surreal twist for anyone who actually follows African politics, it seems the latest meme to take over the internet is KONY 2012, the NGO Invisible Children’s effort to bring greater attention to the horrible actions of Joseph Kony, the leader of the Ugandan guerrilla group the Lord’s Resistance Army (LRA). Suddenly millions of people who had never heard of Kony or the LRA are committed believers in the cause of bringing him to justice (well, at least judging by Facebook status updates, but more on that later…)

So what are we to make of this? It’s hard to say. On the one hand Kony truly is an awful force in Central Africa, and there could be benefits to having more people know and care about the atrocities he’s behind. But the whole thing makes me very uncomfortable for a number of reasons.

To start with, Invisible Children’s past record is, well, at best questionable. Yes, they’ve done a lot to bring attention to the issue, but they generally fall into the “rich white college kids out to save Africa” category, and it’s not clear if they’ve had any real positive impact beyond some fuzzy “building awareness”. They’re something like an advocacy organization, Hollywood production studio, and t-shirt conglomerate rolled into one. I won’t spend forever on it here, but read Chris Blattman and the Wronging Rights folks, both of whom really know what they’re talking about, on some of their past projects…

The bigger issue, though, is what is this all working towards? What exactly are all these newly-inspired Western college kids supposed to do to bring about positive change? The Invisible Children website asks visitors to sign an on-line petition reading “JOSEPH KONY IS ONE OF THE WORLD’S WORST WAR CRIMINALS AND I SUPPORT THE INTERNATIONAL EFFORT TO ARREST HIM, DISARM THE LRA AND BRING THE CHILD SOLDIERS HOME”, conveniently eliding the question of precisely what form this “international effort” should take or what “bring the child soldiers home” will really mean in practice. The reality is that the situation with the LRA is extremely complicated – this piece in Foreign Affairs from last November, when the Obama administration announced it was sending 100 armed “advisors” to assist the Ugandan army in capturing Kony, provides an excellent primer. Kony is one small piece in a long, protracted history of overlapping and intersecting conflicts spilling across Uganda, Sudan, DRC, and the Central African Republic, in which there’s plenty of guilt to be shared amongst all sides and very deep structural political challenges.

So while in some ways it’s great to have more attention on the issue, the fact is there just aren’t easy answers here, and we need to acknowledge the complexity of reality. The problem, of course, is that’s not a slogan which sells t-shirts or inspires viral media campaigns, which need a simple story-line (in this case “IF THE WORLD KNOWS WHO JOSEPH KONY IS, IT WILL UNITE TO STOP HIM” – you know, because if there’s one thing the history of international relations teaches us, it’s that “the world” never has any difficulting “uniting” to solve problems…).

What makes me feel most uncomfortable about the campaign is the fact that it strikes me as remarkably similar to the big advocacy push on conflict minerals a couple years ago, which recent analyses (see this excellent CGD article) suggest has had considerable net negative effects. In brief, the advocacy community took an extremely complicated issue – the ongoing conflict in the DRC – boiled it down to a simple problem – the exploitation of “conflict minerals” which were funding the violence, despite the fact that there was never much evidence for this – and came up with a simple solution – essentially try to stop foreign companies from buying these minerals from the DRC, a provision which made it into the Dodd-Frank financial regulation bill passed in the US a little while back. The effect? Millions of artisanal miners are out of work, smuggling of the minerals is up, and the violence continues unabated. Meanwhile the attention of the Western advocacy community has moved on, apparently now settling on Joseph Kony…

Severine Autesserre had a fantastic article last month in African Affairs covering a lot of these issues (h/t Texas in Africa). The basic point is that simplistic narratives do a good job at raising public awareness, but the problem is they tend to lead to simplistic policy responses, which end up having negative unintended consequences.

What unintended consequences could come out of KONY 2012? Well, to begin with it wasn’t that long ago that peace negotiations with Kony seemed like they might actually lead somewhere; today this path doesn’t look fruitful, but given the long and twisting history of the conflict, who knows what the future will bring. If the KONY 2012 campaign is capable of achieving anything, it’s probably ensuring that there will never be US public support for any kind of negotiated end to the conflict; this could come back to bite us.

Moreover, Chris Blattman raises two critical worries about what a stronger effort to capture Kony could result in. First, there’s a very good chance it will lead to brutal retaliatory attacks, as occurred after the last serious (failed) attempt to capture him, in late 2008. Second, going after Kony means going through the abducted child soldiers he keeps as bodyguards, and who knows how many will die in the effort. Maybe this is worth it to save future children from abduction, but these are pretty serious moral issues to be weighing, which unfortunately again aren’t going to sell a lot of t-shirts…

Anyways, if you’ve made it this far into this post and really want to understand the issues behind the conflict(s) in Central Africa, I highly recommend following Wronging Rights, Texas in Africa, Chris Blattman, and Jason Stearns, all of whom will likely have some insightful things to say about KONY 2012.

Prospects for Chinese Economic Reform: It’s the Politics, Stupid

Last week the World Bank released a massive 400-page report, China 2030, outlining a vision for reforming the country’s economy over the next two decades to ensure continued success. As is typical in these kinds of reports, the main findings are completely reasonable if not exactly ground-breaking: China needs to increase the share of consumption in its economy, lessen the grip of state-owned enterprises, move toward letting the market more accurately price energy and capital, deal more seriously with environmental degradation, and just generally become a more market-oriented economy.

All of which makes perfect sense, and indeed very sensible people have been suggesting more or less this same package of reforms for several years now. But this is all easier said than done, which is why, despite the fact that everyone knows that China needs to shift its development path, there hasn’t really been much progress. The problem is that translating these abstract, widely accepted economic principles into actual concrete policy basically means turning against the country’s exporting class, the very people who have been driving – and profiting handsomely from – China’s economic emergence.

The political economy challenges here are huge. It’s difficult for any government to pursue a reform agenda that will cut into the profits of entrenched special interests. (For exhibit A, see the process of healthcare reform in the US, which we can safely say has been considerably less than Pareto optimal.) But when those special interests are deeply entwined with the government – which, under state capitalism, is pretty much true by definition – it’s exponentially more difficult. Changes in economic policy create winners and losers; when the would-be losers are a powerful bloc within the government, the push for reform is going to have trouble finding traction. You don’t have to be an expert in public choice theory to understand that when the government owns companies that directly benefit from economic distortions, the incentives to remove those distortions are pretty low.

To come back to the China 2030 report, what’s most interesting about it is perhaps not what’s actually said but who’s saying it: the report was co-authored by China’s Development Research Council, a government think tank. So we can start to see some hints about which elements of the government are in the pro-reform camp. And the report has engendered considerable pushback from precisely those groups which a straight forward political-economy analysis would suggest should be opposed, namely the State-Owned Assets Supervision and Administration Commission. The battle lines are being drawn for the fight over economic policy which will play out over this transitional period for China’s leadership.

Understanding these internal political dynamics also raises interesting questions about which Western foreign policy strategies are likely to be most effective in encouraging economic reform within China. Take, for example, the contentious issue of currency appreciation. Let’s assume, perhaps overly charitably, that US politicians routinely raise the issue of China’s currency because they legitimately believe yuan appreciation would be in the United States’ national interest, rather than because they’re simply trying to score some cheap domestic political points via China-bashing. Given the domestic political debate within China, does such a strategy make sense?

To the extent that it allows the opponents of reform to paint the issue of currency appreciation as bowing to outside pressure, the answer is likely no. Given the rise of nationalism in China in recent years – and particularly economic nationalism – it’s easy to see how such a strategy could backfire. Indeed, there’s a parallel to the debate over how enthusiastically the US should endorse opposition political movements looking to overthrow Middle Eastern dictators, where the drawbacks of too close an embrace are more immediately apparent. The last thing Iran’s Green Movement needs is a stamp of approval from the US, which will only undercut their domestic political support. Similarly, the more currency appreciation is perceived as “the policy which the United States is asking for”, the more difficult it will likely be for the reform-oriented wing within China to win the internal political fight. So instead of issuing laughably ill-informed statements on the need for China to increase the value of its currency, maybe politicians should just shut up and let the currency quietly appreciate, as it’s in fact been doing rather nicely of late…

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

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…

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