The Greek Crisis: Uttering the Other "D Word"

Matías Vernengo

Default is not the dirty word that nobody wants to say.  Almost everybody now accepts that Greece will default.  Several people will prefer to use the euphemism of “re-profiling debts,” but we all know what it means.  The interesting thing is that at least some authors, like Martin Wolf in a recent Financial Times column, also acknowledge that default is not sufficient.  The surprising thing that almost nobody asks is whether a default would actually solve the Greek problem.

Of course that would require understanding the problem in the first place.  And herein lies the problem, since most people still argue that the Greek problem is fundamentally fiscal.  In other words, in the conventional view the Greek government spent too much (and lied about it), and the solution must rely on the generation of sufficient fiscal surpluses to pay for the outstanding debt.  Further, to obtain the funds it is assumed that austerity is the way to go, privatizing public firms, cutting public sector wages, and reducing pensions.

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The Greek Crisis: Uttering the Other “D Word”

Matías Vernengo

Default is not the dirty word that nobody wants to say.  Almost everybody now accepts that Greece will default.  Several people will prefer to use the euphemism of “re-profiling debts,” but we all know what it means.  The interesting thing is that at least some authors, like Martin Wolf in a recent Financial Times column, also acknowledge that default is not sufficient.  The surprising thing that almost nobody asks is whether a default would actually solve the Greek problem.

Of course that would require understanding the problem in the first place.  And herein lies the problem, since most people still argue that the Greek problem is fundamentally fiscal.  In other words, in the conventional view the Greek government spent too much (and lied about it), and the solution must rely on the generation of sufficient fiscal surpluses to pay for the outstanding debt.  Further, to obtain the funds it is assumed that austerity is the way to go, privatizing public firms, cutting public sector wages, and reducing pensions.

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Spotlight G20: The G20 Agricultural Action Plan: Changing the Course of Capitalism?

Jennifer Clapp and Sarah Martin*

Nicolas Sarkozy made no secret of his aim to use France’s presidency of the G20 as a platform to address food price volatility with tough measures, including regulating speculation on agricultural commodity futures markets.  As the first ever meeting of the G20 Agriculture Ministers got underway yesterday, he was optimistic about their efforts: “In adopting this plan you will change not only the lives of a billion farmers but the course of capitalism itself so capitalism once again contributes to the development and well-being of people.”

But the Agriculture Ministers, despite having a number of extensive policy options to address volatility, opted for a ‘light’ touch rather than changing the course of capitalism. The Action Plan adopted by the Ministers includes several marginal measures, none of which tackles market regulation. The centrepiece of the plan is the Agricultural Market Information System (AMIS).

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Can’t Pay? Won’t Pay!

Edward Barbier

What do the worldwide debt crisis and global warming have in common?

They both represent economies drawing down assets faster than they can replenish them.

In the case of the debt crisis, economies are spending more wealth than they are accumulating.  In the case of global warming and other symptoms of ecological scarcity, we are using up nature’s capital and its vital services at an alarming rate (see my forthcoming book, Capitalizing on Nature: Ecosystems as Natural Assets).  Rather than adding to wealth – both financial and natural – economies are squandering it.  This is not a new problem but has occurred throughout history, although this tendency has accelerated in recent times, as I show in my recent book, Scarcity and Frontiers: How Economies Have Developed Through Natural Resource Scarcity.

The connection between economic and natural debt is revealed if our conventional measure of economic progress – Gross Domestic Product (GDP) per capita – is replaced with an alternative indicator – Adjusted Net Domestic Product (ANDP) per capita.  As explained in my article, “Tracking the Sputnik Economy” in The Economists’ Voice, calculating ADNP per capita for most economies is straightforward.  ANDP is also a better indicator than GDP per capita of whether or not an economy’s real income is spent on adding to capital – human, reproducible and environmental.

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Spotlight G20: Agriculture Ministers Should Strengthen Government Role in Volatile Markets

Sophia Murphy, Guest Blogger

Tomorrow the first ever summit of G20 Agriculture Ministers will take place in Paris. The French government is to be commended for the initiative. Concerned by the evident disarray in government responses to the food price crisis of 2007-08, the French government moved quickly and deliberately to consider how best to respond. One of their investments, one that might be overlooked in the drama of a G20 summit, has been in research to understand what kinds of tools governments have used to respond to price spikes and volatility, and how effective those tools have been, particularly in developing countries, and particularly with an eye on reducing poverty and vulnerability to hunger. The results of that investment is informing the debate at many levels, and is a welcome addition to a literature that is otherwise rather too orthodox.

One of the main contributors to this research is Franck Galtier, who works with part of the French agricultural research institution CIRAD. Galtier makes the point that countries are each quite different and need their own distinct mix of policies to respond to the specificities of their situation. Galtier has built a typology of responses to price volatility with four categories: measures to prevent (or mitigate) volatility and measures to cope with it, crossed with measures that are designed to leave the private sector in charge versus measures that require the state to intervene. One of his important conclusions is that by far the largest share of international policy advice (and money) for the last twenty years has focused on policies and programs that use public funds either to build infrastructure and open borders; or, to manage risk and facilitate participation in commodities markets. Public interventions to mitigate volatility—to keep prices stable—have been widely neglected. Yet common sense and long experience suggest they might be the best use of money.

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Myth and the crisis of alternative ideology

Salim Kassem, Guest Blogger

In a recent article, Prof. Prabhat Patnaik provided critique of the received wisdom that neoliberal policies hasten capitalist development and hence the march to modernity in a developing context. He rightly arrived at the conclusion that far from dealing blows against the old obscurantist order of myths and self-styled messiahs, neoliberal policies reach a modus vivendi with it, which impedes the march to modernity. Indeed, it does, but not only in a developing context but also in a developed context.

If modernity is to be partly understood as a social and political discourse and practice free of the influence of mythology, shamanism and phantasm, then the case may be that the United States, the leading capitalist power, is anything but modern. One recent occurrence, the speech of Mr. Benjamin Netanyahu, the Israeli prime minister to congress, which had received 29 standing ovations may, in two particular accolades,  unequivocally demonstrate the point. Standing ovations numbered 15 and 16 respectively, in which biblical references to Judea and Samaria and a 4000 thousand years old bond of Jewish people to Jewish land exemplify the body language a state to mythical statements.  How is one to understand this raucous applause to religious myths from the representatives of the most advanced capitalist state, which is, at one end, the ‘realisation of the spirit’ and, on the other the mediation of the varying positions of social classes in society? 

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What about Capital Controls on Outflows?

Kevin P. Gallagher and Stephany Griffith-Jones

In the wake of the financial crisis, Western economists and policy-makers are to be applauded for recognizing that financial globalization has its limits and that capital controls may be necessary for emerging and developing nations to defend their economies from volatile capital flows.   Most of the discussion to date has focused on controls on capital inflows, but could there be a role for controls on outflows as well?

Perhaps controls on outflows in the US would have bolstered the effect of quantitative easing.  There may be situations where developing countries will need to resort to controls on outflows in order to prevent de-stabilizing outflows of capital from their countries as well.

Keynes thought so.  He said that, “control of capital movements, both inward and outward, should be a permanent feature of the post-war system.”  Indeed, Keynes and Harry Dexter White each argued that in order for capital controls to work coordination was needed at “both ends” of a capital flow, meaning at the source of the capital outflow and the receiving end or in terms of capital inflows.

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Whatever happened to stability analysis?

Alejandro Nadal

Once upon a time, stability of the general equilibrium was considered an important element in the education of students in economics. Today it seldom receives the attention it deserves and this is regrettable. Stability is one of the most important aspects of neoclassical theory because it addresses the question of just how the mechanism of free competition in the marketplace actually leads to the formation of equilibrium prices.

This crucial aspect of microeconomics is seldom covered adequately (if at all) in recent textbooks and university programs, whether at the undergraduate or post-graduate levels. Most students spend years learning how individual agents maximize, or exploring cases of oligopoly, or playing around with game theory, but when it comes to stability, their teachers skirt around the main issues.

As a result, a cloud of confusion persists. Students come to believe that somewhere in the sacred scriptures of the discipline there exists a theory that accurately reproduces just how the market forces of competition guide an economy through a price adjustment process that leads to the formation of equilibrium prices. In fact, if stability analysis received the attention it deserves, students would be able to see that it is the most important failure of general equilibrium theory.

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Majority Rule at the IMF

The following post was originally published by the World Policy Institute’s blog, a Triple Crisis partner, by Martin S. Edwards. Edwards argues that the selection of a new IMF leader needs to take all members’ interests into account.

With the recent resignation of IMF managing director Dominique Strauss-Kahn, the issue of IMF governance is on the front burner of international policy. At a time in which there are crucial issues at stake in the global economy, one of the most important international organizations has a very large “HELP WANTED” sign in the window.  There’s already been a great deal of talk about the selection process, and one can even place wagers on who is going to be named as the next Managing Director. The concern, however, should be less with who gets the job than with how they get it.

At the time that these organizations were founded, the unwritten rule was simple – the IMF was to be run by a European, and the World Bank was to be run by an American. Today, it seems that Europe is speaking with one voice in favor of Christine Lagarde, the French finance minister. With a decisive level of support and a large bloc of votes, Lagarde’s candidacy for the next Managing Director looks hard to stop.

The problem for Lagarde is that the world of 2010 is very different than the world of 2000. The IMF’s most important borrowers are now in the Eurozone, rather than in the developing world. The IMF’s message of fiscal consolidation and cutting government spending is not being heard across Europe and the U.S. as these countries struggle to produce vigorous growth. Meanwhile, many developing countries have gone from borrowing from the IMF to lending to it. Brazil, Russia, India, and China have invested a total of $80 billion into the Fund in recent years. This expansion of the IMF’s coffers—which has only come about because of rapid growth in the BRIC countries—has given it more flexibility in dealing with the economic crisis in Europe.

Read the full post at the World Policy Blog.

Towards Productive Forestry

Sunita Narain published the following article in  Business Standard, on the need to re-position forests in development and assess the tangible economic returns of forests.

My position on the need to re-position forests in development has invited a huge response. On the one hand are those who argue that the functions of forests already include conservation vital to life; they need to be valued and protected. The unsaid – but often stressed – corollary is that any discussion on the need to improve productivity of forests through the involvement of people needs to be shunned. The stretched and simplistic position that this view takes is that forests and people cannot go together. One letter writer has even argued passionately that the government should think of taking over – buying out – large areas of forests from people and then protecting them for future generations. On the other hand are those who argue for further engagement of people with forests.

The discussion on this matter is deeply polarised. The two sides are at war, in which both forests and wildlife are the losers. But let me stress again that the stalemate in the forest policy is not tenable.

With each passing day, the constituency for forest protection is shrinking. And this is when forest land in India is under a big threat — not necessarily from the people living in forests but from developers who want the land, minerals, water and other resources. Over time, the infrastructure imperative will take away forests, which have become the only “free” and “available” resource in the time of scarcity. The demand to open up forests will grow.

Read the full article in Business Standard.