Transcript Keynes, Policy Makers and Academic Scribblers

ALL POLITICS ARE LOCAL,
MOST ECONOMIC CRISES
ARE LOCAL:
LESSONS FROM THE LOWER
LATITUDES
Paul McNelis, S.J.
Gasson Lecture
March 19, 2002
Keynes, Policy Makers and
Academic Scribblers
"The ideas of economists and political philosophers, both
when they are right and when they are wrong, are more
powerful than is commonly understood. Indeed, the world is
ruled by little else. Practical men, who believe themselves to
be quite exempt from any intellectual influences, are usually
the slaves of some defunct economist. Madmen in authority,
who hear voices in the air, are distilling their frenzy from
some academic scribbler of a few years back... Sooner or
later, it is ideas, not vested interests, which are dangerous
for good or evil."
— John Maynard Keynes
Escaping Old Ideas
"The real difficulty in changing any enterprise lies not in
developing new ideas, but in escaping from the old ones."
— John Maynard Keynes
Argentina and Indonesia:
Similarities
• Strong charismatic leaders after World War II
• Attempt to be “non-aligned”, find a “third way”
between communism and capitalism
• Highly centralized countries, with long years of
military rule
• Technocratic economic policy: “Chicago Boys” in
Argentina, “Berkeley Mafia” in Indonesia
• Argentina typifies the “old style” crisis, Indonesia
the “new style” crisis
Political Triangles:
Non-Cooperative Games &
Nash Vulnerability
INDONESIA
Chinese
Military
Muslim
ARGENTINA
Agriculture
Oligarchy
Nash
Peronist
Unions
Military (till ‘90)
Corporate Elite (after ’90)
Crises and the Global System
• Origin of both types of crises is local, rooted in
the political history of each country
• Integrated world financial system can certainly
magnify the effects of a crisis
• Each country is caught in a political triangle, with
government debt expansion representing a noncooperative outcome
• Continuing “Nash” vulnerability: how to escape
it?
Old and New Style Crises
• Old style crisis is about fiscal and current account
balances, and “sustainability” of the exchange
rate. If the deficits are too high, sooner or later the
exchange rate will “crack”
• Old Style crisis is there for everyone to see; crisis
“event” often anti-climatic, a “slow motion”
process
• New style is about balance sheets: government
incurring liabilities of the private sector which it
cannot hope to cover, or cover at high costs. “Fast
action” process
New Style Crisis: Vulnerability
• If something goes wrong, suddenly a lot goes
wrong. Very shaky and non-transparent banking
system
• “Until you step in, you do not know how deep the
puddle is”.
• Japanese banks have lent money to almost every
losing proposition of the last 15 years. Little desire
to ask hard questions with their Asian clients,
especially in South East Asia
Argentina
Juan Manuel de Rosas
Birth: 1793
Death: 1877
Argentine Dictator.
Burial: Southampton Cemetery
(Also known as 'Old Cemetery'
Hill Lane, Southampton, England
HIPOLITO YRIGOYEN
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•
•
•
Founder of the UCR (Radical Party)
Implemented democratic and labor reforms
Identified a sense of “argentinidad”
"No he venido a castigar ni a perseguir, sino
a reparar". Rights for labor unions
• Overthrown by military in 1930
Eva Duarte Peron
• Born 1919 in interior of Buenos Aires Province
• By 15, moved to capital city, became a radio and
movie actress
• Met Juan Domingo Peron, Labor Minister, at a
rally for earth quake victims in 1944
• Led the “labor fusion” for Peron, head of
Fundacion Eva Peron, de facto labor minster
• Died in 1952
Juan Domingo Peron-Part I
• Born in 1895
• Educated in military schools
• Participated in coup against Yrigoyen, became
labor minister in “neutral” military government
during WWII, married Eva Duarte, Oct. 22, 1945
• Elected president in 1944 and 1948.
• We are “neither Yankees nor Marxists”, but
“Justicialistas”: the “third way”
• Ousted in coup after Eva’s death,
excommunicated from Catholic Church
Peron’s Journey, Part II
• Met Maria Estella Martinez, “Isabelita”, an
Argentine nightclub dancer, in Panama
• Fled to Spain and Franco, after time in Dominican
Republic with Trujillo.
• Eva’s body sent to Rome
• Excommunicated lifted, Peron marries “Isabelita”
with blessing of John XXIII
• Eva’s body found by Peron and taken to his house
in Madrid
• Lopez-Rega, Argentine magician, becomes
Isabelita’s advisor and body guard in Madrid.
Lopez-Rega
back in Argentina…
• Military government continues, with only a shortlived democracy in late 1950’s
• Peronists divide between “left” and “right”, each
group visits Peron in Madrid regularly
• Perons made several attempts to return
• Finally Perons return in 1973.
• Peron elected President, Isabelita vice president,
1974
• Peron dies in 1975, Isabelita becomes president
• Lopez-Rega becomes advisor, arms “right-wing”
Peronists with uzi machine guns
Martinez-de-Hoz
Dirty War, Technocrats
• Coup against Isabelita Peron by military, “dirty
war” begins in 1976
• Martinez-de-Hoz becomes finance minister,
implements New Orthodoxy with “Chicago Boys”
• Exchange-rate based stabilization policy:tablita
• Fast liberalization of current account: shock
treatment.
• Slow fiscal adjustment, high prices, a major
Crash in 1982, Malvinas war ends military rule
.
Alphonsin
Heterodox Shocks, and Convertibility Plan
• With new democratic government of UCR
Alphonsin, “heterodox” stabilization plan
• Switch to new currency, exchange rate &
wage/price freeze, intended to make
inflation more responsive to cuts in demand
• Early success led to lax fiscal stabilization
• Plans crash, Menem assumes office early,
• Cavallo implements “convertibility plan”
Cavallo
Menem
Collapse of Plan
• Recession after the dollar appreciates in world
markets after 1995
• Radical de la Rua elected President, continues
with convertibility, recalls Cavallo as Finance
minister
• Recessions becomes more severe, de la Rua
resigns, Peronist opponent Duhalde becomes
president
• Menem waits in the wings to run again
Argentina: Real GDP Per Capita
FIGURE 1
DETRENDED Real GDP per capita
1979 = 100
110
105
100
95
90
85
80
75
70
65
60
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
Argentine Annual Inflation
3500
Heterodox Plan
3000
Fall of Military
2500
2000
Convertibility
Return of Peron
1500
1000
500
0
1940
-500
1950
1960
1970
1980
1990
2000
2010
Argentine Fiscal Deficit
(% GDP)
9
8
7
6
5
4
3
2
1
0
1975
1980
1985
1990
1995
2000
Indonesia
Dutch Colonialism
• Differences with English and “Mediterranean”
Colonialism: Dutch just wanted to make money!
• In 1938 one school of tertiary education for every
62,000 Indonesians, in Philippines, ratio was 1 to
1500;
• Divide and conquer approach: segregation of
ethnic Chinese, pribumi, and bules
• Only a small fraction of population literate after
300 years of rule: 10% literacy rate.
Independence: Aug. 17, 1945
• Ambiguity of President Roosevelt: proud of
Dutch ancestry, admirer of Queen
• General Marshall encouraged a peace process
when Independence declared
• Republic forces in Yogyakarta, Dutch in Batavia,
now Jakarta
• Dutch overplay: attack on Republic, but their
weapons bought with Marshall plan money.
• US embargo till 1949 against Holland
• Dutch kept New Guinea
Indonesian Leaders, 1945-2002
Sukarno
Widjojo
Leader of
Berkeley
Mafia
Megawati
Sukarno and Hatta
Pancasila:
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•
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•
•
One God Almighty (not Allah)
Human Dignity
Unity of the Republic
Democracy
Equal justice for all -- neither Islamic Law
nor separate Islamic courts for Muslim
offenders
Political Dynamics in Indonesia
under Bapak Bangsa Sukarno
• Three “players” : nationalists (PNI),
Islamic parties (NU) and communists (PKI)
• Military PNI, but Air Force had PKI
sympathy
• Tensions toward separatism by oil and
resource risk outer islands ( Shiite Aceh in
Sumatra traditionally wanted independence
and nationhood)
Sukarno US Visit in 1956
• Televised speech to US Congress, great rhetoric,
charmed nation and US press
• Kept waiting by Ike at White House because
Sukaro had PKK members in his delegation
• Upset at American hospitality in final interview:
not “Acehenese”, not “provided a woman and
accepted as a relative”.
• After US visit, declared a state of “guided
democracy” in Indonesia
Political Undercurrents:
Bandung Conference of 1956
NAM: Non-Aligned Movement
Tito
Nehru
Nasser
(Egypt first country to recognize Indonesia,
Nationalized Suez in 1956)
John Foster Dulles
Allan Dulles
Dulles Brothers and
Sukarno
• To be neutral was “immoral” to Dulles brothers
and US administration
• Indonesia recognized “Red” China, took aid from
USSR, said no to SEATO
• CIA Plan to “Balkanize” Indonesia thwarted by
Filippina “bar girls” network
• American bomber pilot, Alan Pope, released in
’61, after capture in 1957, to new President
Kennedy, with a request for a good will visit by
Marilyn Monroe
Dutch New Guinea Crisis
• Visited JFK in 1962, warmly received
• Near war over Dutch New Guinea
• Bobby Kennedy visited Sukarno to resolve
situation, and send Peace Corps to Indonesia
• Sec. State Rusk supported Dutch, Bundy at NSC
supported Indonesia on New Guinea
• Ellsworth Bunker mediated transfer of Dutch
New Guinea in Middleberry, Virgina
New Crises: Viet Nam and
Malaysia
• Sukarno came out against LBJ on Viet Nam
• Opposed formation of Malaysian Federation by
British, wanted small independent states; quits
United Nations
• Looked to a wider “republic” including Indonesia,
Malaysia, and Philippines
• Maxwell Taylor visited Sukarno to cool off a war
over Malaysia
Internal Crises, Growing PKI
Strength
• Formed NECO --alliance with China, N. Viet
Nam, N. Korea
• Purge of US-trained academics at universities
(Berkeley Ph.D’s.), AFS students at universities
• “Land Reform” led to confiscation of land from
village Islamic schools, called pesantren
• Formation of a 5th Armed Force, Air Force ranger
batallion, sympathetic to PKI
• Nationalization of more foreign firms
Falling into Chaos: 1965
• By now, Indonesia is ranked the lowest in
per capita income of all Asia
• Inflation reaches 650%
• Suharno goes to Japan, returns with 18 year
old Geisha as his latest wife, Dewi.
• Many old friends are accused of being CIA.
• Sukarno withdraws Indonesia from the UN
Sept 30, 1965
• Assassination of 5 generals, escape of Suharto
and Nasution, whose wife and daughter killed
• Suharto rallies loyal troops, PKK 5th Force
surrenders, General Dani of PKK still in prison
• After burial of Nasution’s daughter, “purge” of
PKK begins by student groups armed by Suharto.
Estimates still vary of numbers killed during Year
of Living Dangerously, 1965-66
New Order: Beginning
Bapak Pembangunan Suharto
• Sukarno under house arrest at Presidential Palace
in Bogor, gradual “Javanese” transfer to power,
Sukarno dies in 1970
• Suharto is de facto President in 1966.
• Berkeley Mafia installed in ministries
• Debt forgiveness cheerfully accepted by US,
since Soviet Union was largest creditor!
• Pro foreign investment: Freeport comes to Irian
Jaya (formerly Dutch New Guinea)
New Order: Growth and KKN
• Success in terms of inflation and growth: 5-10
solution
• KKN and Ibu Tin: the other 10% solution
• Massive capital inflows
• Deregulation of banking, no separation of bank
and firm ownership
• Diversification away from oil to manufacturing
exports: NIKE footwear
• Ethnic Chinese-Military bargain: “triangle” of
Muslims-Chinese corporatists-Military
New Order Foreign Policy
• Ford/Kissinger approve annexation of East Timor
at end of Viet Nam war
• Continues with NAM, but starts APEC and
ASEAN, economic cooperation instead of military
alliance, accepts World Bank aid
• Criticism of Carter administration over human
rights, low tolerance of dissent.
• Anger at Reagan over Law of the Sea reversal,
works out “special understanding”
Kris Mon of 1997 and End of
New Order
• Monetary crisis exposes “rot” of the domestic
banking system
• Protests by students against Suharto lead to his
resignation in 1998
• Habibe becomes president, calls for plebiscite in
East Timor, massive slaughter
• Habibe defeated by Gus Dur, Dur soon
impeached and Megawati becomes President
• Tommy Suharto jailed for corruption
Javanese Wayang:
Hukum Karma
• Student groups, which protested and purged PKI,
led to Suharto’s own undoing
• Suharto kept under house arrest at end by
Sukarno’s daughter, Javanese Hukum Karma
• Recovery is fragile, but under IMF “guidance”,
bank deposits are guaranteed 100% but there is
still little supervision
• Zombie banks are a ticking time bomb
• Decentralization issue for fiscal reform
ICMI: Growing Islamic Pressure
Amien Reis, Speaker of Parliament
Indonesian Center for
Muslim Intellectuals
Muhammadyah movement
“Technology and the Koran”
ISLAMIC LAW imposed in Aceh, creation of religious police,
Departure from the Pancacilla.
Major religious warfare in Ambon
Indonesia Per-Capita GDP
3500
3000
2500
2000
1500
1000
500
0
1970
1975
1980
1985
1990
1995
2000
Indonesian Illiteracy Rates
50
45
40
35
30
25
20
15
10
5
0
1965
1970
1975
1980
1985
1990
1995
2000
Indonesian Fiscal Deficit
% GDP
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1970
1975
1980
1985
1990
1995
2000
Monetary Policy and Exchange
Rates: Pre and Post Kris Mon
16000
14000
12000
10000
8000
6000
4000
2000
0
87 88 89 90 91 92 93 94 95 96 97 98 99
ER
Exchange Rates Pre Kris Mon
2600
2400
2200
2000
1800
1600
87
88
89
90
91
92
93
ER
94
95
96
97
Interest Rate Adjustment
0.8
0.6
0.4
0.2
0.0
87 88 89 90 91 92 93 94 95 96 97 98 99
SBIRATE
70
Annual Inflation
60
50
40
30
20
10
0
87 88 89 90 91 92 93 94 95 96 97 98 99
INFLATIONA
How to Escape Nash
Vulnerability?
• Asian way is evolutionary, with consensus, except
when things get bad!
• Western way is legalistic, institutional
• Traditional IMF/World Bank “Agreements” with
unenforceable conditions will not work in this
culture
• Nor will external “criticism” lead to cooperative
outcomes
• Early warning signals from external creditors on
“vulnerability” may help, if done diplomatically