The MENA countries (Middle East and North Africa) and public choice

Just in case you were wondering how the firestorms in North Africa were being spun in the policy circles of the great powers, check out the latest highly instructive speech by the president of the World Bank (see link below). What Zoellick reminds us of is that street protests are really a demand to equitably distribute economic incentives  so that everyone can behave like economic maximizers. Indeed, he reminds us that economists can bring the political back into economics by reducing democracy to incentives that produce economically rational behaviour.

Apparently people are dying on the streets for the right to be incentivized so that they can behave like Homo Economicus! And what Homo E really is all about is self-evident too, so that the only problem until till now in the MENA countries is that the right incentives did not exist because Oriental desposts were too greedy and hoarded all the economic rewards that existed in the country.

Bloody clan system!

In any case now the World Bank has learnt its lesson. It now know knows that all human being are economically rational (secretly we are all moderns, it is just the clan system that keeps us down).

Thus, from now on the World Bank is willing to partner with anyone in the MENA countries (especially the women)who will free up the flow of incentives so that people all over MENA will become happier.

It is only rational.


And so the WB finds yet another way to absolve itself from thinking about market failure over the past 30 years in the MENA countries. And  so to0 it can really and truly keep the political away from the economic.

But also telling is that this market place of incentives and rewards is what Zoellick thinks democracy in the West is all about too.

And I quote: “These [incentives] are not luxuries reserved only for developed countries. They reflect on the quality of governance. They improve public policy. They signal integrity. They communicate respect for the public. They treat public office as a trust.  They may sound political, but they are certainly economic.

These topics are part of the economics of public choice.  The public choice theorists cautioned us to think about how governments really work, compared with how we might wish them to work.  The public choice advocates have called for better incentives and opportunities for citizens to monitor government more effectively.  They are right.”

(Zoellick, April 2011)

What an innovative vision of humanity!

To find out more about how the World Bank spins protest from 1848 until 2011, follow the link (and yes, Zoellick really does mention 1848):,,contentMDK:22880264~pagePK:34370~piPK:42770~theSitePK:4607,00.html

Political economists on the financial crises: Audio and Video

Greg Albo, a political economist at York university, makes a fine overview of the present crisis and its historical roots going back to the mid 1970s.

MP3 available at Rabble

For a video presentation on the crisis and in particular its relation to the real economy see the following video with Leo Panitch.

Joe “the Riddler” Stiglitz

Joe is slowly figuring it out. The last rumour I heard was that Joe, Jeff Sachs and Bono were in Ethiopia. I think Delong is headed there soon too. But let us not take our eyes off the prize. Here some of the latest copy from Joe:

This article was received from Project Syndicate, an international not-for-profit association of newspapers dedicated to hosting a global debate on the key issues shaping our world.

This year marks the tenth anniversary of the East Asia crisis, which began in Thailand on July 2, 1997, and spread to Indonesia in October and to Korea in December. Eventually, it became a global financial crisis, embroiling Russia and Latin American countries, such as Brazil, and unleashing forces that played out over the ensuing years: Argentina in 2001 may be counted as among its victims.

There were many other innocent victims, including countries that had not even engaged in the international capital flows that were at the root of the crisis. Indeed, Laos was among the worst-affected countries.

Though every crisis eventually ends, no one knew at the time how broad, deep, and long the ensuing recessions and depressions would be. It was the worst global crisis since the Great Depression.

As the World Bank’s chief economist and senior vice president, I was in the middle of the conflagration and the debates about its causes and the appropriate policy responses. This summer and fall, I revisited many of the affected countries, including Malaysia, Laos, Thailand, and Indonesia. It is heartwarming to see their recovery. These countries are now growing at 5% or 6% or more – not quite as fast as in the days of the East Asia miracle, but far more rapidly than many thought possible in the aftermath of the crisis.

Many countries changed their policies, but in directions markedly different from the reforms that the IMF had urged. The poor were among those who bore the biggest burden of the crisis, as wages plummeted and unemployment soared. As countries emerged, many placed a new emphasis on “harmony,” in an effort to redress the growing divide between rich and poor, urban and rural.

They gave greater weight to investments in people, launching innovative initiatives to bring health care and access to finance to more of their citizens, and creating social funds to help develop local communities.

Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription, and prognosis of the IMF and United States Treasury were. The fundamental problem was premature capital market liberalization. It is therefore ironic to see the US Treasury Secretary once again pushing for capital market liberalization in India – one of the two major developing countries (along with China) to emerge unscathed from the 1997 crisis.

It is no accident that these countries that had not fully liberalized their capital markets have done so well. Subsequent research by the IMF has confirmed what every serious study had shown: capital market liberalization brings instability, but not necessarily growth. (India and China have, by the same token, been the fastest-growing economies.)

Of course, Wall Street (whose interests the US Treasury represents) profits from capital market liberalization: they make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc. In South Korea, the IMF urged the sale of the country’s banks to American investors, even though Koreans had managed their own economy impressively for four decades, with higher growth, more stability, and without the systemic scandals that have marked US financial markets with such frequency.

In some cases, US firms bought the banks, held on to them until Korea recovered, and then resold them, reaping billions in capital gains. In its rush to have westerners buy the banks, the IMF forgot one detail: to ensure that South Korea could recapture at least a fraction of those gains through taxation. Whether US investors had greater expertise in banking in emerging markets may be debatable; that they had greater expertise in tax avoidance is not.

The contrast between the IMF/US Treasury advice to East Asia and what has happened in the current sub-prime debacle is glaring. East Asian countries were told to raise their interest rates, in some cases to 25%, 40%, or higher, causing a rash of defaults. In the current crisis, the US Federal Reserve and the European Central Bank cut interest rates.

Similarly, the countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation.

But lack of transparency played a central role in this past summer’s credit crunch; toxic mortgages were sliced and diced, spread around the world, packaged with better products, and hidden away as collateral, so no one could be sure who was holding what.

And there is now a chorus of caution about new regulations, which supposedly might hamper financial markets (including their exploitation of uninformed borrowers, which lay at the root of the problem.) Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments.

Following the 1997 crisis, there was a consensus that fundamental reform of the global financial architecture was needed.

But, while the current system may lead to unnecessary instability, and impose huge costs on developing countries, it serves some interests well. It is not surprising, then, that ten years later, there has been no fundamental reform. Nor, therefore, is it surprising that the world is once again facing a period of global financial instability, with uncertain outcomes for the world’s economies.