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December 7, 2011

Pareto

Political economy of Greece crisis
French Prime Minister Nicholas Sarkozy (and many others before him) recently commented that it was a mistake to allow Greece to be part of Eurozone. An amazing paper by By TAKIS MICHA (Putting Politics above Markets: Historical Background to the Greek Debt Crisis) tells you why such comments are just so true. This paper tells you how Greece is similar to companies like Enron etc that have been fooling its stakeholders for a long time.

The paper says that even early history of Greece system was always centered around political patronage that has been disbursed through increases in public sector employment, regulations that limit competition, and the imposition of levies on transactions that benefit third parties. The resulting system has encouraged corruption, discouraged wealth creation and affected popular ideological narratives. It is amazing to note how every Greek wants to be in civil services as it is most rewarding financially. The fact that two thirds of the electorate is living partly or wholly on government hand-outs significantly affects the ideological narratives that are popular in the country

The view that the state is good and that markets are bad is widespread, held across the political spectrum and are seen as redistribution. But the realization of “putting people above markets” has deepened clientelism and produced the current national crisis.

One can’t help but note how similar all this is in India as well especially the rent seeking and corruption. There is too much of Greece in India as well.

Decline of meritocracy in US economy
An interesting thing to research is whether economists turn philosophers post a deep crisis like and start writing things about morals, society etc. Not that economists are not interested in such issues just that the interests in these areas rises sharply amidst such a crisis.

LUIGI ZINGALES writes on the loss of meritocracy in American society (Who Killed Horatio Alger?). He says foundation of American society has always been meritocracy and Americans strong belief that merit should be rewarded. There is no role of luck and chance in American society. Interestingly, he also adds how America is more tolerant of inequality for the same reason.

What is shaking this foundation? There are two powerful forces – first by a spreading belief that markets are a bad method of rewarding the meritorious. Second by a reduction of the benefits that most people derive from those markets. He shares interesting anecdotes on how America system where now favors the big over merit. Just note how these beliefs have been prevalent in Greece for a long time to understand dangers from such shifts in values.

He points to two policies that could tilt the battle again towards meritocracy – primary education and taxing large corporates. It is a superbly written piece connecting many dots.

Thinking about India economy via global/domestic matrix
SUBI GOKARN recently raised the issue of protein inflation linking high growth to rising incomes which in turn has shifted food consumption pattern and led to higher demand of protein based items. Because supply of these items has not risen, the result is persistent rise in food inflation.

In a new speech (Growth, Resilience and Reform: Reflections on Post-crisis Policy Challenges) he presents an interesting matrix which looks at global growth and Indian growth on one side and favorable/unfavorable on the other. The situation was global favorable and India favorable in 2003-08. 2008-10 was unfavorable for both. Now India moves to India favorable and global unfavorable box. How do policymakers ensure India grows when global economy is still so unfavorable?

There are four challenges that need to be sorted so India can remain in the fourth quadrant of the matrix – Inflation particularly protein and food inflation, Movement of labour from agriculture to industry/services, Financial system stability and capital account management. He misses the most important issue – fiscal responsibility.

He also does not touch on the top left quadrant of both domestic and global growth unfavorable. The way there is policy paralysis, we could be into it as well. There is  a clear danger of the shift from bottom right corner to top left corner as well.

Stronger German labour markets – good policies or plain luck?
When other countries like US are reeling under high unemployment, German employment picture has actually improved. This has usually led to statements by economists praising Germany’s labor market policies. Economists have tried to explain this by praising German labor policies and institutions.

MICHAEL BURDA and JENNIFER HUNT explain the story is not as inspiring as it is made out to be (What Explains the German Labor Market Miracle in the Great Recession?). They look at the reasons given so for strong German employment markets – Did flexibility in hours per worker shield the labour market? Does wage moderation explain the employment pattern? Was there a potential role for labour-market reforms? They dispute all these three reasons with some role of special German labor market programs.

Their reason is actually quite funny. During the export boom years of 2005-07, German exporters did not employ many people as they did not expect the boom to last long. So, they had fewer people to begin with which led to much less firing in 2007 recession. It is as simple as that! All that talk about strong German labor polices and institutions is welcome but is not the story here.

German exporters were quite prescient on this crisis like some economists. Well, if German policymakers had heard their own exporters the impact of the crisis could be much lesser.


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