Hey Good Looking

I recently wrote that too much emphasis was being placed on various development score-cards and indices. I feared that people were confusing the map for the territory and were guilty of practicing cargo-cult science. I argued they were doing more harm than good.

Yesterday, I discovered the work of Matt Andrews, in particular, his distinction between actual good governance and what he calls mere, “good-looking” governance. That is to say countries can make themselves look good on some of these development and governance indices without necessarily improving what actually happens inside their borders.

Matt gives the example of the Open Budget Index, where Afghanistan received a lot of attention for getting the same score as Italy (insert Italy joke of your choice here). However, Matt points out that Afghanistan achieved its ranking by dong well on pre-spending transparency, it did quite poorly on actual spending accountability. He splits the OBI score into parts and produces the following graph:

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So Italy actually has a much better spending process than Afghanistan and Uganda, despite the message of the overall OBI score.

Here’s how Matt eloquently puts it:

“while Afghanistan produces great looking budgets, we have very little idea about what it actually does with its money after these budgets are published. Incidentally, the gap is only 1.8 for Italy according to the OBI data. While Italy may not look as good as one might expect for an OECD country, it is just about as good as it looks. Afghanistan, on the other hand looks as good as Italy but what you see is not what you get (wysinwyg).   It has good looking governance but I’m not sure if you can say that this kind of governance is also ‘good’. And this is after a decade of concentrated and expensive reform.”

Matt argues that this phenomenon both non-innocuous and widespread, “By my estimates the vast majority of developing countries have gaps and ‘good looking’ governance problems and the gaps are growing in many countries after reforms—not closing.

I argue in my recent book that this is because many reforms are adopted as signals—to garner better governance scores and ensured continued support from outsiders—and not real efforts to improve governance. This approach to reform results in new laws, systems and processes being introduced that do not fit the local context, demand more capacity, political will and other content than is available, and are led by groups far too narrow to ensure diffusion and deepening of change. The result is a reform limited to changes in form, but without functionality. Good looking governance rather than good governance.”

To put this in Angus-speak, just like Pacific Islanders after WW II ended, the folks who trust in these facsimiles of good governance will be waiting a very very long time for the cargo to fall from the sky.

The most despised institution in Brazil

In “Public Rage Catching Up With Brazil’s Congress,” The New York Times gives us a pretty good idea about why the Brazilian public is so fed up with their legislators.

Maurício Santoro, a political scientist, notes that “Congress is without a doubt the most despised institution in Brazil” and a big reason for that is the fact that the legislature “has a tradition of preventing its own members convicted of crimes from ever going to jail.”

Almost 1/3 of the current Congress have pending trials in the Supreme Federal Tribunal.  Legislators can only be tried in this tribunal, which means that there are huge delays. Even this is better than pre-2001 though, when  a politician could only be tried if Congress authorized it. Wow, I can see some bad incentives arising from that law.

And what are these legislators on trial for?  Unfortunately, it’s not just a matter of unpaid parking tickets.  Here is the rundown on some of the worst offenders, past and present:

a.”There is Hildebrando Pascoal, commonly called the “chain saw congressman.” When he ran for office, it was public knowledge that he was being investigated for operating a death squad in a remote corner of the Amazon, employing tactics like throwing victims into vats of acid or dismembering them with chain saws. But he still won by a large margin and served in Congress before he was stripped of his seat, convicted and sent to prison.

b. Another is wanted by Interpol after being found guilty of diverting more than $10 million from a public road project to offshore bank accounts.

c. A congressman was convicted by the tribunal of having poor female constituents, who could not afford more children, surgically sterilized in exchange for their votes.

d. In 1963, Senator Arnon de Mello shot dead a fellow legislator on the Senate floor, only to escape imprisonment, since the killing was considered an accident because he was aiming at another senator. (!)

e. That gun-wielding senator’s son, Fernando Collor de Mello, was elected president of Brazil in 1989 and impeached amid a flurry of corruption charges in 1992. Yet in a political resurrection that dismayed anticorruption activists, he was elected to the Senate in 2006 and retains his seat, even as he remains embroiled in a case in the Supreme Federal Tribunal in which he is accused of profiting from an advertising contract scheme during his brief presidency. The article notes that “Even when lawmakers are convicted and sentenced for crimes, it can be difficult for them to lose their seats.”

f. Talvane Alburquerque, a legislator from Alagoas in northeast Brazil, was found guilty in 2012 of ordering the murder in 1998 of another member of Congress, Ceci Cunha. That killing allowed Mr. Alburquerque, Ms. Cunha’s stand-in, to temporarily take her seat in Brasília. An appeals court rejected this month a request from Mr. Alburquerque to be paroled from prison.”

The public is also unhappy with the fact that legislators make $175,000 a year, with stipends to cover housing, gas, electoral research, and up to 25 aides.  In fact, “the frustration toward traditional politicians is so high that Congress now includes Francisco Everardo Oliveira Silva, a professional clown better known as Tiririca, or Grumpy, who was elected in 2010 to Brazil’s lower house with more ballots in his favor than any candidate in the nation’s history.” 

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Selling Money

One of the strangest parts of the Latin American debt crisis is how (and why) bankers were loaning huge amounts of money to corporations and governments in the region in the 1970s with seemingly little idea about creditworthiness.  As I point out in my video on the topic for MR University, “By the end of 1982, the ratio of Latin American loans to equity was in excess of 100% for 16 of the 18 leading international banks in Canada & the US.”

Even worse, “banks were unaware of the purposes for which most loans were used. Nearly 60% of all US bank lending in the 1970s devoted to “general purpose”, “purpose unknown,” or “refinancing.”

I’ve been meaning to read a book by S.C. Gwynne, who gives one of the only first hand accounts of working in this field at the time.  His book is called Selling Money:  A Young Banker’s First-Hand Account of the Rise and Extraordinary Fall of the Great International Lending Boom and I have finally gotten around to checking it out this summer.  It is really interesting and definitely worthwhile for anyone seeking to understand the period and the loan build up better.

By the age of 25, Gwynne had worked at Cleveland Trust Company for less than 2 years, but had already traveled to 25 countries on bank business and was managing $150 million worth of international loans.  As he himself notes, Gwynne was an unlikely candidate to be an international banker, given his undergraduate degree was in history, his master’s degree was in writing, and his work experience only involved teaching French for 2 years.

Sadly, this was far from unusual.  Banks were desperate to ramp up loans to developing countries in the 1970s and “expertise was thin, experience even thinner.  The volume of lending had simply outstripped the ability of smaller banks to keep pace with it.”

Here is Gwynne’s description fo Cleveland Trust Company’s international division:

“Its pool of experts in Latin American affairs consisted of one 32 year old VP with a halting fluency in Spanish and Portuguese, two 30 year old assistant VPs with a a total of 8 years banking experience between them, and me.  I was technically under the supervision of an experienced analyst in the credit department–but he spoke no foreign languages at all, and though he was well-schooled in certain areas of domestic credit, he had no idea what to do with, say, the effects of a massive currency devaluation on a Brazilian company’s balance sheet.” 

He notes that he “had only one month of formal training in a credit class when the bank assigned him to the Latin American area of the international division, although I spoke no Spanish.”  “When I joined the credit department there were 2 other analysts assigned to the international division.  Between them, they had one undergraduate economics degree, one Russian degree, and 3 months of banking experience.”

The description of how they tried to collect data on country risk and how little they actually knew about what was going on is excellent.  It’s too detailed to quote at length here but the following gives you an idea:

“The most popular intelligence-gathering grounds for most international bankers in those years were the central banks, which made sense for they were the ultimate sources of all economic and financial information on a country.  But in fact the loan salesmen couldn’t have chosen a more biased, self-serving, or bureaucratic environment to hunt for their hard facts.  The functionary did not deal in bad news:  that was counterproductive.  He purveyed only the sunnies of current statistics.  If the question you wanted answered was, Should I made a 7-year, $30 million unsecured loan in this country? then you were asking the wrong man.”

All of this reminds me a lot of what one of my former students told me before the financial crisis.  He had gotten a job with a mortgage company after high school and was shocked and appalled at the practices of the company, how skewed incentives were, and how poorly he thought things were going to turn out.  He decided that he couldn’t live with himself doing that kind of work, so decided to go to college instead.  Are there any good first hand accounts by mortgage bankers from this last bubble?

Links I found interesting

1. Nationwide protests disrupt Costa Rica  “President Laura Chinchilla is one of the least popular presidents in Latin America today which some protesters believe makes her vulnerable to succumbing to public pressure and to meeting their demands.”

2. Does it take a village? “No one takes the Millennium Villages seriously as a research project — no one in development economics.” Edward Miguel

3. Sierra Leone imposes travel restriction on bank workers “All employees of the banking sector in Sierra Leone will, with immediate effect, require police clearance to travel out of the country. The new directive, which also affects employees of the National Revenue Authority (NRA) and the Sierra Leone Shipping agencies, is in connection with an ongoing investigation of a massive banking fraud which the authorities believe is aimed at emptying government coffers.”

4. Hoop Dreams in Oaxaca’s Hills “In my part of the Sierra, the basketball courts are like the zócalo in the colonial city,” Mr. Santiago said, using the Spanish word for “plaza.” “It’s really the most important part of the town. A respectable town has a church, and a basketball court in front of the church.”

 

Mexico: “Disappointing Indeed”

Eric Verhoogen has a very interesting working paper called “Industrial Structure and Innovation: Notes Toward a New Strategy for Industrial Development in Mexico.”

While good policies may be necessary for rapid economic growth, it’s increasingly clear that they are not sufficient (see my paper with Kevin, Only Income Diverges: A Neoclassical Anomaly, for more on this topic).  I think one of the reasons for reform backlash is the fact that the promised benefits haven’t been very forthcoming. Mexico is a perfect example of this.

Eric shows that a wide variety of countries have performed better than Mexico in the 1980-2008 period, including Chile, Malaysia, Thailand, Indonesia, Turkey, Hungary and Bulgaria.  Instead, he argues that “Mexico is in a league with Brazil, Argentina, the Philippines, and Romania, none of which has adhered as faithfully to orthodoxy. Mexico convincingly beats only Venezuela. Disappointing, indeed.”

A lot of reasons have been put forth for why Mexico has not lived up to expectations, but Eric has a different perspective.  He argues that Mexican manufacturing have specialized in areas with “low rates of innovation.” While this might have been consistent with Mexico’s comparative advantage, it isn’t a strategy that will fuel economy-wide growth nor move Mexico up the development ladder:

“Mexico has been facing a generic problem of industrial development in middle-income countries: how, in the presence of market failures in the learning process, to continue to move up the ladder of quality and technological sophistication, while staying ahead of poorer countries trying to move up the same ladder. It is not clear that market processes alone would have solved this problem.”

On a more optimistic note, he finds that things are already starting to change and that a different industrial strategy could lead Mexico to much brighter economic future.

Never assume your assumptions don’t matter

I’ve been to a lot of DSGE seminars. At Duke, at the Fed, heck we even have ’em in Oklahoma! One thing most have in common is that they use the Calvo rule to implement price stickiness.

The Calvo rule is a shortcut which assumes that a firm has a fixed probability of getting a chance to change its price in any given period. This probability is independent of how far their price is away from the optimum or how long it’s been since they changed prices.

Time after time I’d object, and time after time I’d be told that the Calvo rule was a benign modeling “trick” that made things less intractable with no real influence on the results.

This morning, I was pleased to discover the research of a young Chicago (Booth) researcher named Joseph Vavra. He’s doing a lot of very interesting work, but what really caught my attention was his piece, The Empirical Price Duration Distribution and Monetary Non-Neutrality.

Here’s the abstract:

Allowing for price adjustment probabilities that vary with the number of periods since an item last adjusted (duration-dependenceí) provides a significantly better fit of observed price spells in CPI and grocery store micro data than the Calvo model, even if the latter is extended to incorporate item-specific adjustment probabilities. Furthermore, extending the Calvo model to match both duration-dependence and cross-item heterogeneity, as observed in the micro data, leads to an increase of 100-230% in monetary non-neutrality, even with no strategic-complementarities. As much as half of this increase is driven by duration-dependent adjustment probabilities.

Nicely played, sir, kudos. Not so innocuous after all, that Calvo rule.

Given how our profession often works, I fear he may have trouble getting this published. But, since he has R and Rs at the QJE and Econometrica, I think he’ll be OK no matter what happens to this piece.

Mexico in transition

I am currently enjoying Jo Tuckman’s excellent Mexico: Democracy Interrupted.  The book is an important reminder that even though Mexico’s one party rule ended almost 15 years ago, the country is still in a period of transition, and a lot of what worked under the monopoly of the PRI is no longer possible.

For instance, here’s an interesting example of the age-old Mexican corporatism in current times (word of warning: acronyms abound in Mexico)

The Secretariat of Government Relations [SEGOB] recently called a meeting with a number of institutions to talk over a new agricultural development plan.  One of the groups, UNTA (the national union of agricultural workers and campesinos (peasants)), was angry that the National Council of Rural and Fisheries Organizations [CONOR] and the National Council of Campesino Organizations [CONOC] and the National Campesino Confederacy were also invited to the meeting. [question: how many campesino unions are there in Mexico?]

When I saw that the group was angry, however, I am unfortunately not exaggerating.  Members stormed out of the meeting and “tore down fences that protect the streets General Prim and Abraham González with the intention of demonstrating at the main entrance of the Secretariat. The police commander [who identified himself as] Spartacus, a negotiator for the police, tried to reach an agreement with some members of the UNTA, but he was ignored and they continued to beat at the police with sticks and stones.”

The protest, which lasted about 20 minutes, injured 6 police offers and 19 UNTA representatives (according to the group).

Perhaps the most amazing part of this story is that after these attacks, the government relented, allowing them to enter the Secretariat offices and begin negotiating again.

h/t Mexico Voices