ALL POLITICS ARE LOCAL MOST ECONOMIC CRISES ARE LOCAL

ALL POLITICS ARE LOCAL, MOST ECONOMIC CRISES ARE LOCAL: LESSONS FROM THE LOWER LATITUDES Paul McNelis, S.J. Gasson Lecture March 19, 2002 Keynes, Policy Makers and Academic Scribblers "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back... Sooner or later, it is ideas, not vested interests, which are dangerous for good or evil." — John Maynard Keynes Escaping Old Ideas "The real difficulty in changing any enterprise lies not in developing new ideas, but in escaping from the old ones." — John Maynard Keynes Argentina and Indonesia: Similarities • Strong charismatic leaders after World War II • Attempt to be “non-aligned”, find a “third way” between communism and capitalism • Highly centralized countries, with long years of military rule • Technocratic economic policy: “Chicago Boys” in Argentina, “Berkeley Mafia” in Indonesia • Argentina typifies the “old style” crisis, Indonesia the “new style” crisis Political Triangles: Non-Cooperative Games & Nash Vulnerability INDONESIA ARGENTINA Nash Chinese Muslim Agriculture Oligarchy Peronist Unions Military Military (till „90) Corporate Elite (after ‟90) Crises and the Global System • Origin of both types of crises is local, rooted in the political history of each country • Integrated world financial system can certainly magnify the effects of a crisis • Each country is caught in a political triangle, with government debt expansion representing a noncooperative outcome • Continuing “Nash” vulnerability: how to escape it? Old and New Style Crises • Old style crisis is about fiscal and current account balances, and “sustainability” of the exchange rate. If the deficits are too high, sooner or later the exchange rate will “crack” • Old Style crisis is there for everyone to see; crisis “event” often anti-climatic, a “slow motion” process • New style is about balance sheets: government incurring liabilities of the private sector which it cannot hope to cover, or cover at high costs. “Fast action” process New Style Crisis: Vulnerability • If something goes wrong, suddenly a lot goes wrong. Very shaky and non-transparent banking system • “Until you step in, you do not know how deep the puddle is”. • Japanese banks have lent money to almost every losing proposition of the last 15 years. Little desire to ask hard questions with their Asian clients, especially in South East Asia Argentina Juan Manuel de Rosas Birth: 1793 Death: 1877 Argentine Dictator. Burial: Southampton Cemetery (Also known as 'Old Cemetery' Hill Lane, Southampton, England HIPOLITO YRIGOYEN • • • • Founder of the UCR (Radical Party) Implemented democratic and labor reforms Identified a sense of “argentinidad” "No he venido a castigar ni a perseguir, sino a reparar". Rights for labor unions • Overthrown by military in 1930 Eva Duarte Peron • Born 1919 in interior of Buenos Aires Province • By 15, moved to capital city, became a radio and movie actress • Met Juan Domingo Peron, Labor Minister, at a rally for earth quake victims in 1944 • Led the “labor fusion” for Peron, head of Fundacion Eva Peron, de facto labor minster • Died in 1952 Juan Domingo Peron-Part I • Born in 1895 • Educated in military schools • Participated in coup against Yrigoyen, became labor minister in “neutral” military government during WWII, married Eva Duarte, Oct. 22, 1945 • Elected president in 1944 and 1948. • We are “neither Yankees nor Marxists”, but “Justicialistas”: the “third way” • Ousted in coup after Eva‟s death, excommunicated from Catholic Church Peron‟s Journey, Part II • Met Maria Estella Martinez, “Isabelita”, an Argentine nightclub dancer, in Panama • Fled to Spain and Franco, after time in Dominican Republic with Trujillo. • Eva‟s body sent to Rome • Excommunicated lifted, Peron marries “Isabelita” with blessing of John XXIII • Eva‟s body found by Peron and taken to his house in Madrid • Lopez-Rega, Argentine magician, becomes Isabelita‟s advisor and body guard in Madrid. Lopez-Rega back in Argentina… • Military government continues, with only a shortlived democracy in late 1950‟s • Peronists divide between “left” and “right”, each group visits Peron in Madrid regularly • Perons made several attempts to return • Finally Perons return in 1973. • Peron elected President, Isabelita vice president, 1974 • Peron dies in 1975, Isabelita becomes president • Lopez-Rega becomes advisor, arms “right-wing” Peronists with uzi machine guns Martinez-de-Hoz Dirty War, Technocrats • Coup against Isabelita Peron by military, “dirty war” begins in 1976 • Martinez-de-Hoz becomes finance minister, implements New Orthodoxy with “Chicago Boys” • Exchange-rate based stabilization policy:tablita • Fast liberalization of current account: shock treatment. • Slow fiscal adjustment, high prices, a major Crash in 1982, Malvinas war ends military rule . Alphonsin Heterodox Shocks, and Convertibility Plan • With new democratic government of UCR Alphonsin, “heterodox” stabilization plan • Switch to new currency, exchange rate & wage/price freeze, intended to make inflation more responsive to cuts in demand • Early success led to lax fiscal stabilization • Plans crash, Menem assumes office early, • Cavallo implements “convertibility plan” Cavallo Menem Collapse of Plan • Recession after the dollar appreciates in world markets after 1995 • Radical de la Rua elected President, continues with convertibility, recalls Cavallo as Finance minister • Recessions becomes more severe, de la Rua resigns, Peronist opponent Duhalde becomes president • Menem waits in the wings to run again Argentina: Real GDP Per Capita FIGURE 1 110 DETRENDED Real GDP per capita 1979 = 100 105 100 95 90 85 80 75 70 65 60 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 Argentine Annual Inflation 3500 3000 2500 2000 1500 1000 500 0 1940 -500 Heterodox Plan Fall of Military Return of Peron Convertibility 1950 1960 1970 1980 1990 2000 2010 Argentine Fiscal Deficit (% GDP) 9 8 7 6 5 4 3 2 1 0 1975 1980 1985 1990 1995 2000 Indonesia Dutch Colonialism • Differences with English and “Mediterranean” Colonialism: Dutch just wanted to make money! • In 1938 one school of tertiary education for every 62,000 Indonesians, in Philippines, ratio was 1 to 1500; • Divide and conquer approach: segregation of ethnic Chinese, pribumi, and bules • Only a small fraction of population literate after 300 years of rule: 10% literacy rate. Independence: Aug. 17, 1945 • Ambiguity of President Roosevelt: proud of Dutch ancestry, admirer of Queen • General Marshall encouraged a peace process when Independence declared • Republic forces in Yogyakarta, Dutch in Batavia, now Jakarta • Dutch overplay: attack on Republic, but their weapons bought with Marshall plan money. • US embargo till 1949 against Holland • Dutch kept New Guinea Indonesian Leaders, 1945-2002 Sukarno Widjojo Leader of Berkeley Mafia Megawati Sukarno and Hatta Pancasila: • • • • • One God Almighty (not Allah) Human Dignity Unity of the Republic Democracy Equal justice for all -- neither Islamic Law nor separate Islamic courts for Muslim offenders Political Dynamics in Indonesia under Bapak Bangsa Sukarno • Three “players” : nationalists (PNI), Islamic parties (NU) and communists (PKI) • Military PNI, but Air Force had PKI sympathy • Tensions toward separatism by oil and resource risk outer islands ( Shiite Aceh in Sumatra traditionally wanted independence and nationhood) Sukarno US Visit in 1956 • Televised speech to US Congress, great rhetoric, charmed nation and US press • Kept waiting by Ike at White House because Sukaro had PKK members in his delegation • Upset at American hospitality in final interview: not “Acehenese”, not “provided a woman and accepted as a relative”. • After US visit, declared a state of “guided democracy” in Indonesia Political Undercurrents: Bandung Conference of 1956 NAM: Non-Aligned Movement Nehru Nasser Tito (Egypt first country to recognize Indonesia, Nationalized Suez in 1956) John Foster Dulles Allan Dulles Dulles Brothers and Sukarno • To be neutral was “immoral” to Dulles brothers and US administration • Indonesia recognized “Red” China, took aid from USSR, said no to SEATO • CIA Plan to “Balkanize” Indonesia thwarted by Filippina “bar girls” network • American bomber pilot, Alan Pope, released in ‟61, after capture in 1957, to new President Kennedy, with a request for a good will visit by Marilyn Monroe Dutch New Guinea Crisis • Visited JFK in 1962, warmly received • Near war over Dutch New Guinea • Bobby Kennedy visited Sukarno to resolve situation, and send Peace Corps to Indonesia • Sec. State Rusk supported Dutch, Bundy at NSC supported Indonesia on New Guinea • Ellsworth Bunker mediated transfer of Dutch New Guinea in Middleberry, Virgina New Crises: Viet Nam and Malaysia • Sukarno came out against LBJ on Viet Nam • Opposed formation of Malaysian Federation by British, wanted small independent states; quits United Nations • Looked to a wider “republic” including Indonesia, Malaysia, and Philippines • Maxwell Taylor visited Sukarno to cool off a war over Malaysia Internal Crises, Growing PKI Strength • Formed NECO --alliance with China, N. Viet Nam, N. Korea • Purge of US-trained academics at universities (Berkeley Ph.D‟s.), AFS students at universities • “Land Reform” led to confiscation of land from village Islamic schools, called pesantren • Formation of a 5th Armed Force, Air Force ranger batallion, sympathetic to PKI • Nationalization of more foreign firms Falling into Chaos: 1965 • By now, Indonesia is ranked the lowest in per capita income of all Asia • Inflation reaches 650% • Suharno goes to Japan, returns with 18 year old Geisha as his latest wife, Dewi. • Many old friends are accused of being CIA. • Sukarno withdraws Indonesia from the UN Sept 30, 1965 • Assassination of 5 generals, escape of Suharto and Nasution, whose wife and daughter killed • Suharto rallies loyal troops, PKK 5th Force surrenders, General Dani of PKK still in prison • After burial of Nasution‟s daughter, “purge” of PKK begins by student groups armed by Suharto. Estimates still vary of numbers killed during Year of Living Dangerously, 1965-66 New Order: Beginning Bapak Pembangunan Suharto • Sukarno under house arrest at Presidential Palace in Bogor, gradual “Javanese” transfer to power, Sukarno dies in 1970 • Suharto is de facto President in 1966. • Berkeley Mafia installed in ministries • Debt forgiveness cheerfully accepted by US, since Soviet Union was largest creditor! • Pro foreign investment: Freeport comes to Irian Jaya (formerly Dutch New Guinea) New Order: Growth and KKN • Success in terms of inflation and growth: 5-10 solution • KKN and Ibu Tin: the other 10% solution • Massive capital inflows • Deregulation of banking, no separation of bank and firm ownership • Diversification away from oil to manufacturing exports: NIKE footwear • Ethnic Chinese-Military bargain: “triangle” of Muslims-Chinese corporatists-Military New Order Foreign Policy • Ford/Kissinger approve annexation of East Timor at end of Viet Nam war • Continues with NAM, but starts APEC and ASEAN, economic cooperation instead of military alliance, accepts World Bank aid • Criticism of Carter administration over human rights, low tolerance of dissent. • Anger at Reagan over Law of the Sea reversal, works out “special understanding” Kris Mon of 1997 and End of New Order • Monetary crisis exposes “rot” of the domestic banking system • Protests by students against Suharto lead to his resignation in 1998 • Habibe becomes president, calls for plebiscite in East Timor, massive slaughter • Habibe defeated by Gus Dur, Dur soon impeached and Megawati becomes President • Tommy Suharto jailed for corruption Javanese Wayang: Hukum Karma • Student groups, which protested and purged PKI, led to Suharto‟s own undoing • Suharto kept under house arrest at end by Sukarno‟s daughter, Javanese Hukum Karma • Recovery is fragile, but under IMF “guidance”, bank deposits are guaranteed 100% but there is still little supervision • Zombie banks are a ticking time bomb • Decentralization issue for fiscal reform ICMI: Growing Islamic Pressure Amien Reis, Speaker of Parliament Indonesian Center for Muslim Intellectuals Muhammadyah movement “Technology and the Koran” ISLAMIC LAW imposed in Aceh, creation of religious police, Departure from the Pancacilla. Major religious warfare in Ambon Indonesia Per-Capita GDP 3500 3000 2500 2000 1500 1000 500 0 1970 1975 1980 1985 1990 1995 2000 Indonesian Illiteracy Rates 50 45 40 35 30 25 20 15 10 5 0 1965 1970 1975 1980 1985 1990 1995 2000 Indonesian Fiscal Deficit % GDP 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1970 1975 1980 1985 1990 1995 2000 Monetary Policy and Exchange Rates: Pre and Post Kris Mon 16000 14000 12000 10000 8000 6000 4000 2000 0 87 88 89 90 91 92 93 94 95 96 97 98 99 ER Exchange Rates Pre Kris Mon 2600 2400 2200 2000 1800 1600 87 88 89 90 91 92 93 ER 94 95 96 97 Interest Rate Adjustment 0.8 0.6 0.4 0.2 0.0 87 88 89 90 91 92 93 94 95 96 97 98 99 SBIRATE 70 60 50 40 30 20 10 0 Annual Inflation 87 88 89 90 91 92 93 94 95 96 97 98 99 INFLAT IONA How to Escape Nash Vulnerability? • Asian way is evolutionary, with consensus, except when things get bad! • Western way is legalistic, institutional • Traditional IMF/World Bank “Agreements” with unenforceable conditions will not work in this culture • Nor will external “criticism” lead to cooperative outcomes • Early warning signals from external creditors on “vulnerability” may help, if done diplomatically