Tag Archives: financial crisis

The Credibility Crunch

So an economist walks into the office and someone asks, “How’s your day going?” to which the economist responds, “Relative to what?”

You may not be laughing, but that’s okay. Relative value is a serious issue, one that the international development community has long skirted.

Government aid agencies, donor agencies, non-governmental organizations, and private foundations all generate piles and piles of information about their programs. They have proposals, memorandums-of-understanding, contracts, grant applications, yearly/quarterly/monthly/weekly reports and evaluations, and other knowledge-sharing publications. These documents work well, as might complex derivatives or informal property rights, until the time comes to compare the relative value of what those documents represent – financial assets, real assets, or development projects. If there is no standardized and centralized process for comparing relative value, for-profit enterprises lose credit, while public or private non-profit entities lose credibility.

The international development community is suffering from a credibility crunch. Every year, promises like the G8′s recent $20 billion for agricultural development coincide with findings like the global hungry recently surpassing a billion people. Even if such lofty promises came true, clouds of criticism and doubt still surround who gets those resources, why they get them, what they are supposed to do with them, and what they actually do with them. Although project monitoring and evaluation have long been recognized as vital to the work of international development, comparing the relative value of one project to the next or one organization to the next, is next to impossible.

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What capitalists and slumdogs have in common

Every single cow in Tanzania has an owner. Every plot of arable, grazable, usable and sometimes unusable land has a public or private owner with certain land-use rights. Every single village in Tanzania has a recordkeeping office that maintains some symbolic representation of who owns which cows, who owns what plots of land, and who owns other assorted income-generating necessities of some not-immediately replaceable value. Every single village has a adjudication process for settling disputes over who owns what in each village.

In the first of USAID’s 2009 Summer Seminars, Institute for Liberty and Democracy (ILD) Founder and President Hernando de Soto spoke about how ILD works with the poor around the world to verify the existence of such records, offices, and processes, and linked the financial crisis in developed markets to the struggle of countries such as Tanzania that wish to eradicate poverty. The challenge for both developed and developing markets, is about the lack of standardization.

Considering that often the first time assets and owners in developing countries are identified on paper is in court documents, de Soto explained that each village court has its own separate method of documentation. Financial institutions similarly have created proprietary systems for documenting and managing derivatives. Without standardized methods of appropriate documentation, de Soto argued, hard economic times will continue – for the poor and for financial markets.

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Quo Vadis, Central Europe?

Central Europe is back in the news. When 8 former communist countries of the region joined the European Union in 2004, followed by Bulgaria and Romania in 2007, it seemed that their path toward stability and prosperity was on a rather straightforward upward trajectory. Enter the world financial crisis. Hungary and Latvia stumble badly and ask for IMF help; Romania follows; capital flight and speculative attacks rock the value of the local currencies; unemployment rises and so does debt, especially in foreign currencies.

The picture is bleak but not uniformed. Poland, the region’s largest economy big enough not to depend excessively on declining exports, is doing relatively well. The Czech Republic, the second-largest economy, as well as Slovakia and Slovenia – the region’s two countries that have already joined the Eurozone – are also far from a meltdown. But the question on everybody’s mind is whether the economic turmoil will affect the political sphere if the crisis continues.

Edward Lucas, Central Europe Correspondent for the Economist, recently said on NPR that the great danger of the current trouble is that it’s not only a financial crisis but it translates into social and political one as well, as the region’s still relatively new democratic systems are coming under considerable strain. But the Economist also highlights some reasons for (qualified) optimism:

    So far, the economic crisis has not translated into populist or protectionist politics. It is the east European countries that have been demanding that the rest of the EU stick by the rules of the single market. Their development over the past decades has been thanks to the free movement of capital, goods and labour. They would like a lot more of it: in a contest to subsidise industries, rich countries always win. But that stance will not hold indefinitely if things get worse.

Coverage of The Financial Crisis

Russia and Ukraine have many things in common in the current financial crisis and economic downturn.  As Russia is watching the capital run out of the country ($50 billion last month alone), politicians in Ukraine are bickering about that check from the IMF.  These days, whether its Russia or Ukraine, everyone wants and needs every last million.

But there is one thing that sets apart Russia and Ukraine – its not the financial crisis itself but the coverage of it.  Simply put, the state-dominated Russian media presents a much more limited view of the ongoing economies woes than media in Ukraine.  How so and what are the implications? – Marc Schleifer and I talk about it in more detail in our recent op-ed in the Moscow Times.

There is just one comment there, but it is quite groundbreaking – apparently there is more media freedom in Russia than anywhere else.  Media Freedom Index authors would probably disagree.

Eastern Europe sailing into uncharted waters

Ukraine has just been promised $16.5 billion from the IMF to prevent its financial system from collapsing. Hungary will also receive a rescue package of yet unspecified value. The value of Polish zloty has fallen around 17 percent against the dollar over the past week, and more than 10 percent against the euro. As stock exchanges plummet, currencies collapse, and economists cut once-hot growth forecasts, these are the new hard times for the countries in Central and Eastern Europe – even those like Poland that until recently seemed relatively immune to the global financial crisis.

But it’s not just the economies of those countries that warrant closer scrutiny. The fallout of the crisis may be as big or greater in the political arena. Ukraine, for one, is not a pretty picture and others may follow. The crisis is exposing not only the weakness of the transition economies, but also the shortcomings of their political systems that will make it difficult to deal with the crisis. The Economist observes:

    And that is the deeper problem for eastern Europe: not so much financial wobbles and weaknesses, but corrupt and incompetent politics. Their leaders found it hard enough to govern efficiently even when times were good. What will happen when foreign investors are stingier and growth slows or stops?

Now, when steering the region’s economies out of the stormy waters is combined with the unavoidable necessity to go back to tough unfinished reforms (public finance, labor market, education, etc.), the current financial crisis is a test of those young democracies as well. And the Western countries, once sure examples to follow, are being crushed by the magnitude of their own problems and offer little in a way of useful guidance.

    The political compass, which once sent a reliable, if often ignored, message about the needed direction of policy, is swinging wildly as Western governments break taboo after taboo in the hope of fending off financial meltdown. For countries that have been told that privatisation, liberalisation and balanced budgets are the sure path to salvation, these are confusing times. The result, says Ivan Krastev, a Sofia-based pundit, is “an implosion in the idea of normality”.

Can Europe – and in particular its Eastern half – cope?

Media Freedoms and Lack Thereof

I was in the Hague earlier this week, participating in an anti-corruption conference, and was able to follow the financial crisis by checking in whenever possible with CNN and BBC on TV and the Wall Street Journal and the International Herald Tribune – all that was easily available around me.  It may not have been much, but enough.  The coverage was certainly extensive, with much time and column space devoted to discussions on problems, solutions, finger-pointing, and other related issues.

One thing that was hard not to notice while in Europe is that the media there spent a considerable amount of time covering their own financial issues, just as in the US much focus is on domestic implications of the crisis as well.

A few days before that, however, I was watching a Russian television channel and it was hard to ignore the fact that in covering the financial crisis in a news segment, they spent about 10 minutes on problems facing developing countries.  At the same time, they included only a brief note on the fact that the Russian government is taking care of things at home.  The bias in coverage, as well as the different tone between Russian and foreign reporting, were quite interesting to observe.

The Moscow Times also noted this divergence, pointing out that on a day when trading was suspended on the Russian market due to the sharp declines:

Instead of reports about the markets’ losses, the three main television channels — state-controlled Channel One, Rossia and NTV — showed billionaire Mikhail Fridman telling President Dmitry Medvedev that the global financial meltdown offered new opportunities for Russian companies abroad. 

“I am convinced that the Russian financial system is protected from such a fundamental shock to a greater degree than many other countries,” Fridman told Medvedev at the Gorky presidential residence outside Moscow.

At the same time, on the cover of WSJ there was an interesting image that showed the declines on the Russian market year-to-date as compared to their developing counterparts.  While developed markets showed around 30-35% declines for the year, Russia was at the bottom of the chart with more than 60%. 

The difference in coverage in Russian media should have been in the opposite direction, at least if one were to look at the markets’ slide.  But I wonder if state media sources have the desire/willingness/and ability to do so (like their counterparts abroad)?

The failure of regulations is not the failure of markets

The ongoing financial meltdown has raised voices lamenting the failure of market economy and prophesying its end as a viable system for achieving prosperity. But there is nothing failing about the basic market principles or their capacity to deliver economic growth: property rights, price mechanism, efficient contract enforcement, or fair competition remain as valid tools for development as ever. Instead, what the current crisis illustrates is the failure to provide appropriate regulatory and institutional incentives that would responsibly guide the behavior of market actors.

While overregulation is harmful to the economy, regulation per se is not the same as excessive interference of governments in markets. In fact, it is the very essence of how markets are defined in the first place. In an advanced economy, complex exchanges (say, credit default swaps) cannot self-regulate because the incentives to do so are simply not there. The parties benefiting from the exchange are too far removed from the greater economic risks of their actions to fully incorporate those risks into their investment decisions.

A modern economy is more than Adam Smith’s pin factory. The essential principles remain the same, but the larger system rests upon a complicated framework of man-made rules. There is one crucial lesson here often overlooked by developed and developing countries alike: the quality of political governance is inextricably linked with the quality of economic performance because it is the political system that defines economic rules of the game.

If we want to assign blame for the current crisis, it is much more the shortcoming of governance than the failure of market economy. Government policies can create market incentives that spur sustained growth and development – or lead to economic trouble. Democratic governments don’t always succeed in the former, but particularly in a crisis like this one, democracies are still best equipped to examine the causes in a transparent way, introduce more accountability, and correct the incentive structures.