Among that doughty tribe calling themselves “professional economists”, the declaration made last week in Tokyo by the Chief Economist of the International Monetary Fund (IMF), the Frenchman Olivier Blanchard, to the effect that research at the institution had demonstrated fiscal multipliers (FM) to be notably higher than had originally been supposed, aroused considerable concern. For most people, however, Blanchard’s statement is of no concern. The effects of austerity budgeting by governments have been felt acutely by millions of people, especially those living in the heartland of professional economism. To tell them that there is a relationship between the size of FM and the behavior of the IMF, and that had the institution not operated on the basis that FM are small it might not have propounded its austerity message (the same one it has propounded since its establishment nearly 70 years ago), matters not a jot. The horse has bolted, and the stable itself is rocking.
This furor among the catechists has had the unfortunate collateral effect of distracting attention from a far more important declaration also made last week by the head of the IMF, Christine Lagarde (also French, but there is no need to read too much into the nationality etiquette – it’s the intellectual label which is of much greater significance). She announced that the time honored doctrine of IMF doctors, namely to regard all countries as the same and to prescribe the same medicine for them all, just might not be the most precise. It could be that, in the future, the IMF would consider the possibility that “custom made” could fit better than “off the peg”. For students of geography and history this recognition of differences must come as a mighty relief. They can feel comforted that all their efforts to examine the impacts of location, climate, culture, social structure, to name but a few, on economic performance have now been legitimized. But for anyone with an iota of common sense, the Lagarde Declaration (LD) is downright alarming.
People now know that, half a century before the “Washington Consensus” of the early 1990s, there was another which has remained essentially unaltered since it was first set out, and which has been the operating instrument with regard to public financial governance throughout those decades. In its close on seven decades of existence, the IMF has reinvented itself, at least cosmetically, on several occasions. Though it is 40 years since President Nixon officially cut the Gordian knot between the dollar and gold, the institution has in the interim put its finger into many pies – commodity markets, economic growth debates, oil crises, governance, whatever. The institution’s chameleon like behavior has, of course, not gone unnoticed. Indeed, this author recalls some 20 years ago reading extensive essays in no less august a newspaper than the “Neue Zuercher Zeitung” (which could scarcely be accused of being unfriendly to the financial community) forcefully arguing that the IMF should be closed down on the grounds that it was obsolete. Anyone with some experience of public institutional life is aware that such calls to arms are rarely heard – if it is mightily difficult to set up an international public institution (IPI), it is well- nigh impossible to close it down. Defendants of the body have not been inactive. Just a few weeks ago, in another newspaper not wholly disconnected from monetary affairs, “Financial Times”, a leading professor at the University of Oxford was to be found busily arguing for yet another role for the institution.
It is indeed encouraging that a French lady has found the occasion to repeat the cry “Vive la Différence”. Given that her immediate predecessors in the job were also French (Michel Camdessus and Dominique Strauss-Kahn), and had failed to emphasize differences, some of us were beginning to worry that our gallic brothers were in the process of forgetting how unique they regard themselves. Fortunately, our gallic sisters have not lost track of their special characteristics. Mme Lagarde, distinguished (inter alia) for her prowess as a swimmer, has clearly pulled the institution out of the deep end. But what should be done, now that countries are officially regarded as different? Will it not involve a prodigious amount of work to start looking in detail at the way each IMF member country actually is, at trying to understand the particular sources of its problems, instead of following the much simpler path of lumping them all together in the lumpen?
To illustrate the challenge, let’s consider the European “PIIGS” where the double “I” covers both Ireland and Italy. To the undiscerning eye, the inhabitants of the “Porcelino” (stye – the Italian word is not only more graphic but was also the title of a memorable film on the human condition by Pier Paolo Pasolini ) may all look and sound the same – fattish, gobbling down all they can get, living in rather unsanitary ways, and forever grunting. A more careful look might push the generalizations further. The PIIGS seem to be a rebellious crowd, creatures which, more or less in Bretton Woods lifetime, have engaged in civil wars, overthrown governments by more or less bloody means, been ruled by military and pseudo military juntas, and, with the possible exception of the “P”, shown a disturbing tendency to excessive behavior of every ilk. So is there anything to be gained by treating this species as if it were anything other than one and the same lot?
The answer is not that there is something to be gained, but rather that there is everything to be won. If, as more and more members of the doughty tribe mentioned at the beginning of this piece appear to believe, governance matters enormously, then it seems reasonable to reckon that some knowledge of geography and history (and that’s a bare minimum) might help in offering thoughts about how to improve governance. It helps, for instance, to appreciate that an Italian realizes that the territory where she lives is not a nation, whereas an Irishwoman identifies fiercely with her country. Given that Italy has a population 15 times that of Ireland, the consequences of this difference in attitude (the attitude multiplier, AM) are profound for financial management, and the location of decision making. Add Spain to the mix. One of the pillars of the post Franco constitution of some three decades ago was precisely to emphasize the importance of the autonomous regions. Degrees of freedom in public financial management, while differing in magnitude from Cataluna to Estremadura, were at the center of the debate. They still are. It is no accident that the endlessly repeated demands for Catalan independence have in the last weeks reached a crescendo as financial imbalances at regional level move close to the top of the agenda.
The institutional forms a country has are the product of its past, and are intended, in the best of cases, to provide a springboard towards a better future. Yet they are mostly the result of compromises which serve to let steps be taken now, though they might render future steps more arduous. Spain, Italy and Greece all had to draft constitutions which somehow could permit a wide range of voices to be heard, and thus (hopefully) ensure that everyone would obtain some bit of the economic pie. That essentially political objective had a heavy price, namely (and the pun is unfortunate) pork barreling. To try and hold things together, distribution was assigned a major place, and not too many questions were asked about how public money was actually used. In the case of Greece, even this did not save the country from almost a decade of military rule and the reenactment of the civil war of the late 1940s (this tragic event now appears to be going through its third act, thus far mercifully less murderous than the first two acts). All five countries received major and long lasting injections of fresh cash from the regional and structural funds of the EU (as it is now called). How these were used was also monitored in weak fashion, giving politicians at national and regional levels plenty more scope for distributing largesse according to criteria in which merit and need did not figure near the top of the list. Additional foreign funding may have been well intended, as a boost towards infrastructural and technical modernization, but it actually retarded institutional modernization.
It is through this unfortunate process that all five countries suffer, in quite acute forms, from the “casta cancer”. Politicians of all colors and at all levels, along with administrators and other public officials, are now the targets for major protest movements in all countries. Those with whom the IMF is dealing, and making accords, are exactly the people who are very little trusted by the populations. Corruption is the cry in some of the PIIGS, especially Italy and Ireland (both countries have a long tradition in this art and science), while connivance is the other call, primarily in the other three countries. Hence it is correct to argue that some similarities exist among and within the PIIGS, and it is possible to go as far as asserting that that a reduction in the availability of public funds should make life tougher for the casta.
But the reasons for the similarities are different from one place to the next, and the ways through which solutions can be sought are still more different. In some places the value of any kinds of elections, unless conducted with severe limitations on who is allowed to stand for office, is profoundly questioned. Italy, for example, has regional elections in Sicilia and Lombardia this coming weekend. In the former region approximately 80% of existing parliamentarians are standing again, while in Lombardia the current governor, under the most serious charges of corruption, has sought to mobilize his clientele in his effort to stay in the post. Spain held national elections last year, and a mild assessment of the performance of the government would be pathetic. Greece has had a couple of national elections within the past 6 months alone, and it has been no surprise to see that only newcomers to the business seem to have made real inroads. Ireland has been different, notwithstanding the farcical efforts of the former head of Anglo Irish Bank to present himself as a savior to the country which he himself has made no small contribution to ruining.
The IMF is thus confronted with a massive challenge if it is to act in harmony with the LD. Its own long held doctrine was one of the forerunners of the business notion of Global Best Practice (GBP). This general approach is predicated on the idea that, in allegedly technical matters, all should converge towards a universal behavioral norm. But that is hazardous behavior in the extreme. Even if there were something to the particular set of prescriptions offered, and they were regarded as the best there is, another aspect of economic thinking (and indeed of common sense) should always be kept to the forefront. That is a concept called “the Theory of the Second Best”. It says that, in situations where many things are out of kilter, pulling one of them alone into its best position might not necessarily be the smartest move. Why? Because there is no a priori reason to think that changing one area to put it in line with “the best” will be beneficial to the whole terrain. Examples of this abound. Even in economics itself, the great international trade innovator, Jacob Viner, applied the idea some 60 years ago in a slim volume entitled “The Theory of Customs Unions”. He demonstrated that if some trade liberalization takes place through a few countries forming a customs union, the net result might not improve welfare all round. There will be gainers and losers. So, while free trade as an absolute, across the board idea is good, when you start from a very imperfect base, following the free trade notion might not be the smartest thing to do. What should you do? The answer is: know the specifics of the situation facing you, and act in that light.
Differences and similarities constitute the texture of the policy making cloth. For those who want to do the designing, they cannot afford to remain in ignorance of them. For those actually doing the weaving, the differences and similarities are the very stuff of their work. And for those trying to sell the policies to the population – well, good luck ! The distinguished head of the Bocconi, and presently in charge of the Italian government, has found that IMF can be an acronym for more than an institution (“Its Monti’s fault”). In other countries the German Chancellor has seen her name too in the center of the acronym (“Ist Merkels Fehler”). Let us hope that these two, plus countless others, keep a sharp eye on specifics, and glaze over the generalities.
Peter O’Brien 24 October 2012
