Why Nations Fail

1. Why Nations Fail Elusive Quest for Growth Exorbitant Privilege Talvi: New International Monetary Architecture Antholis: China/India Federalism McMafia: Global Crime Reinhart: Debt and Crisis Kimenyi: Educational Reform Can It Scale? Gaddy: Virtual Economy Bear Trap Crisis: Is This Time Different? Lombardi: Regional Monetary Arrangements Soviet Extraction: Ukrainian Famine

2. IT Revolution: A “New Economy”?IT Revolution: A Critical Juncture? Superstar economy Heightened income inequality: Global elite…the 1 % …the 0.01 % Heightened spatial inequality Conquest of geography? Financial innovations Fragility and crisis  New international monetary architecture? Floating and Its Discontents Managed float: intervention  $ reserves  $ privilege Currency misalignments  Currency crises Latin America’s “Lost Decade” Tequila/East Asia Global demand for $s  Capital inflows to US US International Debt  Threat of “Bank Run” The US Housing Bubble  (Developed) World in a Slump Dysfunctional US Finance/Dysfunctional US Politics

3. The Euro: An Alternative to the $? Why a €? • Euro economics: Transactions costs/CAP/German Discipline • Euro politics: Integration  Peace/Tie Germany to West Europe Eurozone Imbalance • Early 2000s: German wage discipline  German competitiveness  Current account surpluses • Capital inflows to peripheral countries  Financial bubbles/Housing bubbles/Fiscal bubbles Iceland/Cyprus/Ireland/Spain/UK/Greece/Italy/Portugal • Iceland: When fishermen become investment bankers Crash  Brit and Dutch Screwed • Cyprus: Oligarch/Mafiya Laundry Crash  Russians Screwed

4. Talvi: New Economic Geography • Latin American and other emerging economies not dragged down by the crisis • Chinese expansion  commodity boom • Latin American countries with relatively high net commodity exports advantaged by rising commodity prices • Advanced country deleveraging •  capital inflows to emerging economies •  growth of emerging economies

5. Carmen Reinhart’s Remarks: Carmen bemoans debt • Emerging economies had reduced debt • Deleveraging followed 1997-98 crises • Advanced countries (and Emerging Europe) entered crisis with high Public + Private Debt • Deleveraging has been and will continue to be prolonged ~ Decade  Downward pressure on demand, output, and employment • Massive monetary easing lightens debt burden • Stemmed debt deflation spiral • But private saving eaten up by public borrowing • Vulnerabilities for emerging economies • Build up of domestic debt • Brazil: private debt and non-federal government debt Reinhart: For a banking crisis, don’t need external debt, just debt • China slowdown  commodity price collapse

6. This Time Ain’t Different Reinhart and Rogoff “Excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.” “Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced.” Highly leveraged economies “can seem to be merrily rolling along for an extended period, when bang! - confidence collapses, lenders disappear, and a crisis hits.“ Eight centuries of experience suggests this time is not different.

7. U.S. Debt History

8. This Time Ain’t Different Consequences of banking crises • Real GDP down – Unemployment up • Government revenue down • Government bailout of banks • Government debt/GDP UP • But 90% is not at ratio to be feared • Austerity sucks...and doesn’t spur recovery “A recession is no time to cut spending” • Prolonged slump • Deleveraging • Zero lower bound  Monetary policy weakened

9. Aggressive Policy Response  No Depression

10. Mc Mafia: A World Tour Israel • Homegrown crime: Gambling/Ecstasy: From Antwerp to US • Russian mob: Prostitution/Human trafficking The Balkans • Smuggling duty not paid (DNP) cigarettes • Cocaine processing and distribution: Colombian connection Kazakhstan: Caspian caviar Russia – Gazprom – Ukraine – Hungary: Pipeline scam Dubai: A perfect laundry • 9/11  Arab money flees US to Dubai  Building boom • Labor camp squalor/Prostitution/Domestic worker “imprisonment” Nigeria: 419 scam: I go chop your dollar.

11. Antholis: China and India – The Political Realities • China and India are not monolithic states • Regions and provinces matter • India: 35 states/China: 22 provinces + Taiwan • Local issues  Beijing and New Delhi can’t easily lead • Migration • Land acquisition for industry and urbanization • Infrastructure provision • Fiscal federalism: Center bail-out of sub-national entities • China: GDP Monotheism/Fragmented Authoritarianism • Central Ministry – Provincial Government Matrix • Global Coast vs. Protectionist Interior • Special Enterprise Zones/Environmental sustainability issue • India: Secessionist Threat/Ethnic Conflicts/Caste Conflicts • Regional parties critical for Congress or BJP coalitions • Advanced States: Benefit from high-tech diaspora • Backward States: Cronyism • Legacy of socialist subsidies: Unreliable power/shoddy infrastructure

12. Gaddy: Russia, Before and After Soviet growth under extractive institutions • The Easy Part: Move resources from low productivity agriculture to higher productivity manufacturing • The Hard Part: Spur innovation/Creative Destruction • Perverse quotas and prices The Post-Soviet Virtual Economy • Loss-making manufacturing ought to shut down • Unemployment/Social discontent • Siberian industries and cities ought to be downsized • Extreme cold/high transport costs  uneconomical settlement • Primary producers/fictitious prices maintain the status quo • Oligarchs keep export earnings • Putin maintains power: A “protection racket” • Required subsidy grows with time  Unsustainable Bear Trap

13. Reversal of Fortune: The Fertile UkraineFrom Breadbasket to Bloodland Ukraine: central the Stalin and Hitler visions 1928: First Five-Year Plan...Accumulate surplus value Collectivize agriculture: War for Grain Crops the property of the Soviet State Liquidate the kulak class Decision by a troika Execution Exile to forced labor: canals, mines, factories Kazakhstan, Urals, Siberia Remain to farm...to starve The Toll: 2 ½ million “missing” in Ukraine census 7 million “missing” in Soviet census

14. Kimenyi: Can Contract Teacher Results be Scaled Up? • In randomized experiment implemented by NGOs, low-paid “contract teachers” performed better than higher paid civil service teachers in Western Kenya. • But can the result be scaled up, i.e., when implemented on large-scale by government agencies? • Another randomized experiment performed: half the contract teachers working for NGOs, half for government agencies. • Government hired somewhat more “qualified” contract teachers • Government hires more likely related to someone in system • Other things equal, only NGO contract teachers performed better than civil service teachers • Payroll delays significantly affected performance/Paym’t by gov’t more delayed • Kimenyi concludes: Don’t leave education reform to government • Alternative conclusion: Clean up the payroll system and public education will do fine • Equal fractions of NGO and gov’t teachers did well enough to be hired full time