Club Troppo

Public debts in Southern Europe only grew in 2011, and they were already unsustainable in 2010. Worse, the interest rates these countries have to pay on their debts has grown as all the long-term rolled-over debt held by these countries now carries a 7% upwards interest rate.

Greece is the worst affected, with a government debt to GDP ratio of about 160% and getting worse. It is clearly now on the other part of the Laffer curve and further tax increases will not lead to more tax revenue, but less tax revenue. Whilst for other countries, an ECB bailout is the most likely scenario, Greece is on a collision course with an official default that it can no longer turn away from. No one seriously believes the Greeks are going to pay their loans back. Greece is drifting irrevocably into the situation whereby it will officially default and simply not be able to pay the wages of its civil servants, the pensions of its elderly, and have Greek banks collapsing around them as well, unless the ECB bails them out completely, which now seems unlikely. Re-introducing a Greek currency would mainly add huge capital flight to the woes and solve nothing in the short run. It really is looking rather bleak for Greece at the moment, whether it manages to trick the rest of Europe into another stay of execution or not.

Here, I want to point to particularly interesting political processes that have locked Greece into a default death spiral: political paralysis, civil service paralysis, and population paralysis. And at the heart of them are the special interest groups that dominate Greece.

What do I mean by special interest groups and their hold on Greek society? Iannis Carras wrote a hilarious and informative piece on how it works in Greece. Iannis relates the story of how a particular set of rent-seekers conspired to divert water from Western Greece to Thessaly by means of large construction projects. Diverting this water via large dams and reservoirs was done against the wishes of local residents, against EU planning rules, and against the ruling of the Greek high court judging it to be illegal. How did the rent-seekers get round this? They nominally broke the project of water diversion from one region to another into several smaller ones and simply kept going. And what drove this project? European cotton subsidies! Cotton is very thirsty and so water was diverted to the area more suited for cotton. Who drove it? Construction companies, Thessaly major farmers, and Greek politicians, all happily flaunting Greek law. Worse, it turned many a Greek politician and former farmer into a pure rent-seeker. And once they got into that game, they kept going. A favourite means of extorting money out of their own government is now for Greek farmers to simply block the roads until someone gives them money!

Other examples abound. Greece is now full of museums, ports, and roads which no-one uses, paid by the European Union and spawning groups of entrepreneurs everywhere whose main income in life comes from lobbying either the EU or any other major institution. Indeed, in a quite cruel illustration of the increased power of vested interests in these times, Carras notes that the only real reforms being implemented in Greece are all in favour of the construction industry. The most recent such example is the removal of environmental obstacles to build houses, effectively allowing large-scale theft of government natural reserve land by private companies,  which in turn makes a mockery of the intended sale of that same government land. A sale which was hoped to reduce the government deficit!

Iannis Carras’s sobering conclusion is that ‘EU aid has strengthened the position of intermediaries and rent-seeking elements in the Greek economy.’

Then the issue of paralysis, whereby the main thing to say at the outset is that paralysis mattered because it prevented structural reforms from happening.

Importantly, structural reforms could have tilted the balance of whether default was inevitable, but it has turned out to be impossible to legislate and enact structural reforms. By structural reforms, I mean tackling tax evasion, opening the economy up by means of labour market reform, and dismantling the legal apparatus supporting strong special interest groups that paralyse the professional service sectors and the civil service. Such structural reform was needed to get economic growth going, has been advocated by virtually all intelligent observers inside and outside of Greece, and initially would have involved pretty simple off-the-shelf legislation. Yet, it has not been done and it now clearly wont be done, even though the consequence is a disaster for the country.

The first and probably most important lock-in process is the civil service: the need for quick spending cuts meant that the public sector had to reduce in size and freeze wages. What do you think happens inside the ministries when this occurs? That the lesser-paid remaining employees are going to do their utmost for their country by devising and enacting radical reform legislation, or that those who remain will be the weaker ones who couldn’t get decent jobs elsewhere and whose principle worry is not to rock the boat and retain their job? The right answer is the latter.

As a result of this paralysis of the civil service, the sheer capacity for structural reform has been strongly eroded, as was nicely illustrated in this excellent piece on the impossibility of reforms. Greece, and to some extent also Spain and Italy, is now less able to legislate and support structural reform than 2 years ago. All that remains is austerity packages, which are technically easy: bit less money here, slight increase in tax rate there. Nothing new has to be set up or thought through.

(Continued)

About 8 months ago, I had a look at what was then happening in the Arab world and made predictions about what was going to happen next. Time to see what really happened and update the forecast.

A minor prediction I was making was that Libya would again succumb to the resource course, making democracy impossible there, an article taken over by the Congressional Quarterly in the US (December edition). So far I am looking good for that prediction, with individual cities maintaining their own prisons and militias, as well as open fights about the division of the oil spoils.

The main prediction I was making concerned Egypt where I predicted the regime would re-constitute itself, coopting deal makers in agricultural and slum areas. I predicted that the urban youth which was driving the protests would lose out.

This is indeed exactly what has now happened: the army has put the torture chambers on full throttle in order to intimidate the urban youth. The elections have clearly shown that the largely uneducated and agricultural population has no appetite for supporting intellectuals in cities, and has gone for what they know, which is the muslim brotherhood, more radical muslims, the army, or some regional politician. The muslim brotherhood, which over the years has become so infiltrated by the regime that it was amongst the first to condemn the original protests against Mubarak, has about 40% of the preliminary vote and the reform parties have merely 15%. The radical Islamists get 25% and more regional parties make up the rest. Given that the army has already decided to simply give itself some seats in parliament if it needs them, as well as several more months of systematic torture of any opposition before parliament is even convened, one is already seeing a grand bargain between the Muslim brotherhood and the regime: a further move towards religious austerity in exchange for no challenge to the economic parasitism of the army. Egypt will become a very dull place indeed.

(Continued)

Last month, I talked about the route that Mario Monti should take with Italy if he truly wanted to get it back to a higher-growth path. My advice was to take on the rent-seekers in blitz-reforms, whilst keeping the population in a state of great anxiety about the economy in order to reduce political opposition. Freeing the Italian economy from the many rent-seeking groups that stifle it was in my opinion needed to get long-term growth. I questioned whether Mario, the ultimate financial insider, was up to that kind of job.

How did he do?

Well, I would say he went one-third on the mapped route. As advised, he moved with lightning speed, bringing forward a set of reform packages by December 4^th, less than a month after taking power. Also, as advised, he went for some quick hits on existing vested interests. His increased tax on property and his taxing of funds owned up to after a tax-amnesty make up the majority of his tax increases and are visible forms of taxing the wealthy. He went for welfare reductions by removing the indexation of pensions for a few years (exempting the poorest) and a general tax increase via more GST.

In terms of long-term reforms, he went for pension age reform, which is a move that will not have major short-run fiscal benefits because in reality almost no-one works until the official pension age anyway and hence pension age reform should be seen as a long-term reform designed mainly for the civil service that retires early: it takes a long while for the various pension ages to adjust to the official one and for significant groups of people to go through the new system. Perhaps most important for the long term is that Monti is trying to reform the calculation of pensions such that they reflect total contributions rather than the wages of the last few years. Anyone who knows anything about pensions knows that that is a fairly revolutionary change and that it cant be done in the short run. It simply cannot be implemented retrospectively because of missing information about past wages. It is even hard to imagine that the whole stock of current employees close to retirement will be subject to this change, so I can only guess that the fine-print will say that it only applies to pensions from some far future date. It is a good example though of the kind of reform that economists have been calling for for decades (it is a key example in my own co-written econ textbook) but that you need the right moment for in order to push it through politically.

Yet, Mario didnt go for the truly debilitating special interest groups that would open up the economy in the short-run. No tackling of the laws on retrenchment, which is a real problem for hiring. No tackling of the professions (doctors, etc.), which debilitate much of the tertiary sector. He is even promising more unhelpful subsidies for business, like subsidies for eco-friendly building.

Hence, to be brutal, Mario went for the easier targets and didnt do much. Reduced welfare, an indexation freeze on pensions, indirect increases in income tax (i.e. via the states and not the central government), increases in GST, and a couple of obvious long-run reforms that will take decades to come into effect. No concerted effort to go after the tax avoiders and the fat-cats that dominate the political landscape in Italy. No major clashes with the unions either. Indeed, the size of the reform (20 billion Euro more taxation and 10 billion extra spending) is pretty paltry if you consider the problems that Italy faces (with about 2 trillion in debt). There is hence more of the appearance of decisive action, whilst the reality is that of a couple of helpful long-run changes whilst no major interest group has been offended in the short run. Indeed, all the reforms look pretty much off-the-shelf to me, which tells you there is little going on in the background in terms of policy development. Italy is not getting ready for real change.

What does this mean for Italy in the longer run? It most importantly means that there is now a much higher chance that Italy will default on its government debt: the reforms are simply not enough to either pay back the debt nor do they give confidence in medium-term future economic growth that would get rid of the debt.

Mario Monti undoubtedly knows this. So what game is he playing? Is he hoping for a miracle in the form of suddenly returning faith that Italy will always pay its debt and thus a return to 2% bond interest rates? I suspect he is not really hoping for a miracle but consciously has resigned himself to some form of default and meanwhile simply refuses to attempt the politically difficult, which is to take on the major interest groups that paralyse Italy and make it a place you prefer to visit rather than work in.

It is hard to know what Monti’s end game is, or even if he has one. Perhaps he thinks he can have another round of more serious reforms if this one gets through parliament. Perhaps he simply thinks this is the best he can do given the internal political realities of Italy. Perhaps he is trying to put Italy in the position where it could get by if it merely defaulted on the foreign part of the debt, not the domestic part, which in turn would strengthen its bargaining position in a bailout scenario. Whatever the end-game is, with these baby-reforms Monti has proven himself to be a conservative who will not upset the internal status quo. They chose well.

What is the road of least resistance scenario, and thereby the most likely scenario, for the Eurozone financial crisis? To solve this conundrum, we need to map the major elements of high resistance around which the road must navigate and the areas of low-resistance towards which the road will flow. These are:

1. (high resistance) It is actually politically very hard for any country to leave the Euro. If, say, Greece announces it leaves the Euro then one should expect a bank-run overnight with Greece deposit holders cashing in their savings and putting it in foreign Eurozone banks. Moreover, it might easily take a year before Greece could physically re-introduce its own currency, during which time the uncertainties and capital flight accumulate: money-machines have to be changed, accounts have to be converted, export contracts have to be re-written, and a system of converting anything valued originally in Euros into the new currency has to be negotiated. Apart from being a major hassle requiring expertise many countries do not have, it would give all the other countries an immediate excuse to stop paying that country any transfers. Young ambitious Greeks should be expected to shun a defaulting Greece. It is hence quite costly in the short run to step out of the Euro, as well as virtually guaranteeing a severe deepening of the recession overnight. This is equally true for any other country in the Eurozone: leaving the Euro is a bold and courageous step, unlikely to be witnessed any time soon. The road of least resistance therefore does not include any single country leaving the Euro.
2. (low resistance) The political costs to defaulting within the Euro are, when one reflects on it, surprisingly low. Greece has in effect been defaulting for several years now and has been handsomely rewarded with transfers and debt-write-offs. It was certainly the road of least resistance within Greece to steer straight into default. So too will the governments of Italy and Portugal be calculating that any default on their debts is a viable scenario and preferable to major internal upheavals that could be blamed on the government of the day. For what are other countries actually going to do when governments default on their debts? Not much. There is no mechanism via which they can kick countries outside of the Eurozone or the EU, so barring a whole set of richer countries deciding to set up a new EU and abandoning the rest, the Euro countries are stuck with each other. Countries cant kick each other out, nor can they really force any sanctions within the system. If, say, Italy decides to only pay back the government bond loans to its own banks in order to prevent them from going bankrupt but defaults on any loans held by foreigners, then the other countries have no other course of action than to protest and take the hit. They might retaliate by not honouring any loans to Italian banks but, again, apart from a wholesale break-up of the EU, they actually have surprisingly little means to punish any country. This incidentally is true even under the newly proposed stability pacts: if a country simply refuses to pay any fines then there is not much the other countries can do. Hence, defaulting is a low-cost option for individual countries.
3. (high resistance) The political costs for the rich countries to start a new EU of their own, the so-called rump-Europe scenario, is surprisingly high. Think firstly of how the richer countries benefit from the current union: because they suffer less from civil-service-demanded wage growth, their countries are more competitive precisely because they are in a currency-union with countries that do suffer more from civil-service driven wage inflation. This guarantees them higher levels of employment and exports, a brain drain of the less well-organised countries towards them, and very low interest rates at which to borrow, all advantages that would disappear if they cut the ties. Also, cutting the union would not in fact mean that their own banks would no longer be linked to the government bonds of other countries so cutting political ties does not actually stop the financial ties. Hence the economic benefits are neither immediate in the short-run, nor obvious in the long-run. Then think of the politics by thinking of the mechanism involved in breaking away: the countries would have to formally abandon the EU, would have to negotiate their relation with the Eurozone with those remaining in the EU (!!), then set up a new treaty for a new zone and introduce a new currency or convert the Euro into a Euro-plus that would hold for their region. Each step has to go through all the parliaments involved, virtually guaranteeing years of wrangling about the shape of a new treaty. Now, this scenario is certainly imaginable, but would take years to go into effect and hence cannot be sold by any politician as the solution to anything. Hence, a break-away by the rich countries would only be assured to lead to short-term economic loss (the countries being set loose would have to default almost immediately, with all the consequences associated to that) without clear long-term gain. It is therefore not a viable scenario. What rich countries can do is to ensure their own banks and economies are less exposed to those of the high-debt countries, but that is a slow process that takes years.
4. (low resistance) The European Central Bank’s determination not to become a printing press is, probably, brittle. Mario Draghi, the president of the ECB just last week reiterated how countries must help themselves. At the moment hence, the ECB is sticking to the line that it is there for price stability in the Eurozone and is refusing to write blank checks to over-spending governments.  It is quite openly gambling on the current crisis to force governments into tighter spending regulation, with, it might be said, some apparent success. Yet, if the going gets really tough and neither commercial banks nor governments have the cash to pay back their loans to each other and to outsiders, is the ECB really going to refuse to bail out governments and the financial sector by means of printing money? It would seem highly unlikely that the ECB would indeed keep up its refusal for massive capital injections if its back was against the wall because it really is the only institution that can do it. More probably, it would indeed take on the role of the American Fed and simply print money on a massive scale to prevent widespread bankrupcies of governments and banks.

With this contour map in mind, the road of least resistance is starting to come into view. (Continued)

I was in a conference in Tokyo last week on the topic of advancing the use of well-being indices throughout the world, hosted by the very generous, civil, and well-organised Japanese. One of the great things about such conferences is that you get to exchange views with smart people from other countries. A particularly memorable example was a conversation about what was really happening with climate change policies around the world, between myself, a Maldives scientist and an Indian senior civil servant. The key question was whether or not the Maldives should count on the rest of the world to save them from rising sea levels. Allowing for my imperfect memory, the conversation roughly went like this:

Maldives: so, when are you guys going to get serious about preventing my country from flooding?

Aus: you come from the Maldives, right? Haven’t you got any hills?

Maldives: no, our highest point is about 3 meters.

Aus: so low? Why aren’t you already flooded by the occasional hurricane or tsunami?

Maldives: we have a ring of coral around us sheltering us from the worst of the storms. So the real worry is the overall sea levels.

India: you have that prime minister who became all emotional at the last talkfest, dont you?

Maldives: yes, that is him. Our prime minister is very vocal at conferences.

Aus: so he should be. You guys are f*cked. We are just pretending to be interested in averting climate change. We dont actually care at all.

Maldives: do all Australians swear so much? You are joking though, right? Havent you guys just agreed to introduce the world’s highest carbon tax and promised a reduction in your emissions?

Aus: (snort) yeah, that fib was quite the media success. It even made the BBC. Dont be fooled though, we are not going to diddely squat. I challenged the climate scientists to an open bet on all the key promises saying that none of them were going to happen. No takers and plenty of endorsements. All the smart money in our country says we are not going to do anything of substance anytime soon. Neither is the rest of the world.

India: yeah, forget about asking us. You rich guys have had your turn. Now that it is our turn to zoom you shouldn’t ask us to worry about emissions.

Maldives: what do you mean you are going to do diddely squat? You have legally binding emission reductions, havent you?

(Aus and India both look with a mixture of incredulity and pity at Maldives)

(Continued)

(cross-posted from Core)

The Italian political scene has given rise to a phenomenon seen often in developing countries: a care-taker government run by a respected economist with an implicit mandate to ‘get the country out of the mess’. That mess, a public debt of 120% of GDP that outside financial observers are increasingly sceptical can be paid back, has two possible happy endings: some outside agency manages to miraculously get Italy to grow or Italy manages internally to re-start economic growth.

In terms of what the best policy would be to get Italy growing again, you don’t need to be a genius economist. It can be summed up in one phrase: the special interest groups that paralyse Italy need to be tackled. Well, that and producing babies again, for there is no long-term growth without people!

What special interest groups, you might ask? The tax evaders, which are heavily represented in the top layers of society; the entrenched old civil servants who are close to an overly generous pension paid for by too few young workers; the many special subsidy receivers (including millions of welfare dependents); the criminal gangs who siphon off parts of the national wealth and evade taxes (the shadow economy is estimated by Schneider, using fairly controversial methods, to be 20%); the professional cartels who have a stranglehold on health and bureaucratic services (think of medical specialists and the closed professions); etc.

It’s not the solution that is hard, but implementing the solution: tackling special interest groups is incredibly hard. They are well-organised, know the law better than others, have their tentacles through all the main political parties, have captured part of the public debate such that few even recognise that they are the problem (rather, they are seen as the pillars of society), and they are highly alert to any threat to their position. This is also why they are so entrenched: before any political party can mount a campaign against them, they would already have opened a counter-attack against the political forces mustering against them. They are undoubtedly watching the situation closely, ready to fight any incursion to their rights.

So, what should Mario Monti do?

My advice is to move with lightning speed and to actively maintain a sense of desperate crisis until a reform package is agreed and is being implemented. Mario has to feed that atmosphere of desperation and encourage a widespread belief that Italy is staring into the abyss if he is to have any chance to dislodge some of the major interest groups. The first thing he should do is to arrange for new information to be brought out every week outlining how much worse everything is than previously imagined. The debts are higher, tax collection is lower, crime is higher, capital flight is worse, etc. This is the time to talk Italy down, whilst projecting confidence that he knows how to get Italy out of it under the right ‘tough measures’.

How quick should he move? I would say that he would need to get key legislation to parliament that tackles the most crippling interest groups (tax evaders and ageing civil servants) in no more than a couple of weeks. If he gives the interest groups 6 months to rally against him, he has no chance. Undoubtedly, the interest groups will still mount demonstrations and a vigorous media campaign if he manages to get legislation to parliament within weeks, but if he is fast enough then Mario will have the advantage that there is a feeling of desperation and that there is no alternative to his package.

(Continued)

The political fight over climate change policies continues to rage in our parliament, with the shadow minister for Climate Action apparently threatening a double dissolution of parliament if that is what it would take to repeal the current policies. The deeper question for analysts in the background is whether emission policies are a political feasibility, not just at the world level but even within Australia.

Some public commentators believe that reducing carbon emissions is possible and that we are on the right way with the current policies. Others, like me, see carbon emission policies as a political dead end and advocate geo-engineering and adaption. Hope versus realism one might say. Endless debates full of emotions and hot air ensue, yet how can an outsider tell who is right?

In the best of Aussie traditions, I propose a set of gentlemen’s wagers. For each one, the stake is 1000 AUS to a favoured charity (mine is Amnesty International). The propositions[1] which I offer to any Australian scientist active in the climate change debate are:

1. Australia will not meet its 2020 Kopenhagen emission commitments in that domestic emissions in 2020 will not be at least 5% lower than they were in 2000.
2. World emissions of CO2 (measured by the EIA) in 2020 will be higher than they were in either 2000 or 2010. And there will be no global Emission Trading Scheme in 2020 of which the participating countries cover at least 80% of world GDP (measured in PPPs).
3. Both Australian and world coal production will be higher in 2020 than in 2010.

 Conditions: first come, first served; names are made public; scientists active in the debate only; I win if and only if, measured in 2021, the proposition holds; disputes to be settled by ESA peers; offers close end of October 2011.

Proposition one should appeal to Labor politicians who write flowery speeches about how the government’s emissions policies are good policies that are going to work. I am calling those policies symbolic wastes of time that are not going to achieve anything substantial, like delivering our promises. The bet is on domestic emissions because there is some chance we will pay other countries to pretend they are reducing their emissions, which should not count.

Proposition two is a judgment on world developments and is a challenge to anyone who believes serious international cooperation to reduce emissions is going to happen. Note that there are various non-political events that could deliver the outcome: a major world recession or a technological breakthrough could also tilt emissions down, so one gets several bites at the cherry.

Proposition 3 is a direct challenge to those who believe Australia is serious or will become serious about carbon emission reductions: the whole point of emission trading schemes is to get to a situation where we stop digging up our fossil fuels and leave them unburnt in the ground. The wager is that neither Australia nor the world is going to actually do this.

Why am I offering these wagers? Because I have found that scientists often dodge the question of whether their policies are politically feasible. They debate on the basis of the policies they want to see succeed rather than on the basis of what could succeed. The arguments are thus emotional, involving the intricacies of climate science, or how we owe it to the next generation to do something. Yet, precisely when you truly believe the doomsday scenarios and our inter-generational obligations, you need a calm look at what is politically feasible in this world: whoever thinks carbon emissions policies are not going to work given the political realities of this world, owes it to the next generation to say so and move on to advocating things that might work. If those emotionally defending current policies believe their own words, they should be brave enough to take up the offered wagers.

I would advocate more bets on this debate and others debates in which the number of participants is too small to sustain a commercial betting market. Bets are an open signal to the public as to where the balance of probabilities lies on complex questions. They are a quick way to force scientists to stop posturing and have a calm look at the political realities of the world, which in turn should help to focus the policy debate on what is workable.

Besides, Australia is the betting capital of the world and we should make that national trait work to our benefit.

It is easy to become absorbed in particular problems and in the disaster stories that dominate the daily media. Climate change, natural disasters, wars in Africa and Asia, Financial Crises, riots and food price rises: you would be forgiven for thinking the world is going to the dogs. Is it really, however, or is that just the gloom you get from staring at the problems and not smelling the roses?

The major indicators of how we as humans are doing are smelling exceptionally rosy. We are living in a golden age of progress and opportunity for humanity. Let’s list some of the big changes in recent times:

1. Life expectancy is going up by a lot. Whereas the average Australian would not have expected to see 50 in 1885, the average Australian now can expect to live beyond 80. The same trend goes for both developed and developing countries. For the world as a whole, the World Bank reports that life expectation has thus crept up from about 52 in 1960 to 69 in 2009. And the increase is greatest in poorer countries, so there is even increased equity in terms of life expectancy by country.
2. There are more of us every year, but the numbers are stabilising. According to this source, we used to be with no more than 50 million some 3000 years ago, reached 1,5 billion in 1900, now count close to 7 billion, and can expect to be with close to 10 billion in 2050 after which a reduction is expected. Whilst the increased numbers, who can all expect to live longer than our ancestors ever could, is itself a sign of success, the expected peaking, due to reduced fertility levels virtually everywhere in the world, is also very good news because it means the old nightmare-scenario of a Malthusian melt-down is now highly unlikely.
3. We are less and less violent. Trends in murders and homicide are at incredibly low levels from an historical point of view: whereas our hunter-gatherer ancestors were believed to kill off about 1 in a 100 every year, modern Western society sees one homicide per 10,000 as very violent, corresponding to exceptionally violent countries like the US. More normal levels are in the order of 2 per 100,000. Globally, the trends have even been going down in the last 10 years. Trends in armed conflict also speak of exceptionally peaceful times. The Upsalla Conflict Data Program thus collects statistics on how many combatants die in total in organised conflicts around the world. The basic facts are that the period just after WWII was easily 5 times as violent as the 1980s per capita, whilst the 2000s are easily twice less violent again than the 1980s. The trend for the last 10 years too has also been clearly downward in per capita terms.
4. Less of us are poor and more have access to basic facilities (clean water, sanitation, literacy, etc.). Global output growth in 2011 is in the 2-3% range, the vast bulk of which in poorer countries. Great news for inequality reduction hence.
5. We are getting happier as the poor amongst us are getting richer. As one can see from the World Value Survey, the relation between income and happiness is very robust by country and we furthermore know that countries who escape dire poverty also increase their happiness. So the world as a whole is almost certainly getting happier. Even within countries that are in an economic downturn like the US, the average life satisfaction is about as high as it was before the downturn.

On Monday, the Crawford school at the ANU ran a symposium on whether or not the government policy on carbon emissions was good policy. The video of the event should shortly appear here.

The main surprise for me was to see how clearly some of  the other economists speaking there, like Warwick McKibbon, David Pierce, and Henry Ergas, were skeptical about the prospects of serious coordinated international efforts to reduce carbon emissions.

The message of my presentation was that it is time to get more serious about adaptation. The synopsis of my presentation is over the fold.

(Continued)

(note to self)

Just a week ago, the betting markets still gave Gaddafi a 40% chance of remaining in charge till the end of the year but now the markets have given him up for a lost cause. The Arab Spring can hence boast another regime change, and this time one that is quite complete: there is almost no existing government bureaucracy that remains in place after the change because there was no Libyan government bureaucracy in the first place.

It is also a victory for French and English pride: as I predicted 4 months ago, the European countries caved in to their own need to keep face once they started interfering and they thus armed and trained the rebels, whilst NATO acted as the rebels’ air force. They said they wouldn’t arm the rebels at the time but it was obviously more important to win than to stick to that promise. And it must be said, the victory has been well-managed so far with few reprisals. It is a good day for international justice.

What next for Libya? If you read the constitution that the Transitional Council has put up, you get to read a carbon copy of the constitutions of Western nation states. If nation building was hence only about laws, the Libyans are going to be just like us. With a GDP per capita of around 20% of that of the US (which is high but still down from 100% in 1980!), an urbanisation rate close to 80% and a relatively large tertiary student base, no government debt worth talking about, and more revenues than running expenses, you would think that if any Arab country could pull off a modern democracy it would be Libya.

Libya will be a good test of the political-economic theory of the ‘natural resource curse’ which holds that a country with weak institutions burdened with a lot of money flowing in for no effort is going to end up very corrupt and un-democratic. There are many variations to this theory (for an example paper of my own on this issue, see here), but the essential story is that the rents created by the resource lead to a political system oriented solely around fighting over those rents, leading to exclusion of losing groups and of the non-resource sector. Under the curse, it is too hard to develop a vibrant manufacturing or export-oriented service sector when the natural resource rents make the exchange rate high and gives the politicians too little incentives to provide public goods oriented towards the non-resource sector. Having to fend on its own and surrounded by rent-seeking politicians looking to tax anything visible, the modern sector dies in childbirth and the country remains poorly educated and un-versed in the ways of the modern economy, merely living off the resource rents while they last.

There are two scenarios for Libya, one in which it overcomes this curse and one where it once again succumbs to it.

(Continued)