The Power and the Money

History matters

 It appears that Germany’s president has just resigned for saying, “A country of our size, with its focus on exports and thus reliance on foreign trade, must be aware that military deployments are necessary in an emergency to protect our interests, for example, when it comes to trade routes, for example, when it comes to preventing regional instabilities that could negatively influence our trade, jobs and incomes.”

The president didn’t say that the deployments in question would have to be unilateral, just that they would have to be. (The country in question does indeed have troops in Afghanistan, Bosnia, Lebanon, Kosovo, and Sudan.) The reaction is ostensibly over the implication that Berlin has troops in Afghanistan to keep trade routes open, but that idea is so obviously ridiculous that it is hard to believe that it is actually the root of the controversy.

If you are expecting me to speak badly of the political reaction to the comments, think again. Despite Angela Merkel’s wishes, history weighs heavily on many foreign views of the Federal Republic. I know Germans who have been dismayed to discover this.

That history, however, means that it seems to me entirely appropriate, even heartening, that the President came under such a firestorm. I would call anyone who denounced such an obvious comment in the United States an idiot. I would not have a whole lot of respect for someone in, say, Canada or France or Brazil who said likewise. But for better or for worse, Germany has a different burden than Canada or France or Brazil.

By the way, Germany won the Eurovision song contest! Who knew? That the Eurovision song contest was underway, that is. I didn’t.

Why oh why oh why would Germany leave the eurozone?

 A long time ago, the group bloggers over at a Fistful of Euros gave me the okay to join them. I turned it down. Who needs a bigger platform? People might notice when you say something dumb. I felt very good about my decision when the New York Times wrote about “the influential Fistful of Euros blog.” (Didja know about that, Doug?)

That said, being obscure has its downside, especially since nobody will answer your question: why would Germany want to leave the eurozone? Edward Hugh said it again. Others have intimated it. But nobody explains why this would happen! Now, I know Ed is important and all these days, but I really would like to know why this logic is wrong. C’mon, Ed, somebody, help a brother out. Alex, can you poke him again?

Hot tea is unpleasant in the Miami heat, I think

 Regardless of my own opinions, I have to admit that this is clever political messaging:

 
My wife and I spotted it heading south on I-95 yesterday, right before the exit to Opa-Locka Boulevard. The phone number goes to a voice message saying, “Please leave any comments about the billboard after the tone.” The mailbox was full when we called. Some googling revealed reports that the number belongs to somebody called Robert Núñez, but that name is not particularly useful in most of America, let alone Florida.

Anyway, we found it amusing. Not as amusing as the Miami Heat player with his basically naked entourage of three women eating outside at Smith and Wollensky, or the dolphins cavorting in Government Cut, or the little black stray kitten that high-fived my wife (I am not exaggerating that last: she stuck out her palm to introduce herself and the kitten lifted up a paw, tapped her hand, and strutted off) or the children playing on the rocks (with the stray cats), but amusing nonetheless. Ah, Miami. Whenever I develop a good hate for the place, it does something weird enough to charm me back.

Off to a birthday party for a two-year old cousin. Hasta.

My wife is very sensible

 I am big fan of Rachel Maddow, and I am a green green. But my wife thinks that she is going a little overboard about the Deepwater Horizon disaster, and I agree. “The energy in your studio comes from somewhere, Rachel,” she says.

Do not get us wrong. There were screwups that Petrobras and Statoil would not have committed. Nor do we care if BP goes bankrupt and ceases to exist as a result of the disaster. In fact, that would be a fine outcome. (Lift the caps! Go after them! My wife, the same one who thinks that banning offshore oil is bad idea and demonizing B.P. is silly, would be very happy at that result.) 

Everything has risks and returns. Offshore oil is actually a tiny piece of the U.S. energy mix. It is not as though the waters of the South Atlantic are inherently more valuable than the Gulf of Mexico, but they are our waters, and if we choose not to risk them then that is a fine idea. But we should not get too out of hand in demonizing our inability to contain the leak.

I am working on this stuff pretty thoroughly, and thus the lack of posts. But my wife's opinion seems worth sharing.

De tocho morocho, dice el IMF a la madre patria

 The IMF just published its report on the Spanish economy. It isn’t good. As for what to do? Well, the boffins at the Fund recommend a little of everything:

• Fix the wage-bargaining system ... the IMF thinks an agreement will be ready by May, not apparently realizing that it already is May;
• Lower severance payments to fired workers;
• Change to an “opt-in” rather than “opt-out” system for collective bargaining, whatever that means;
• Eliminate indexation;
• Speed up implementation of the E.U. Services Directive (although the madre patria has done pretty well on this tip;
• Liberalize more product markets (big boxes and power centers, here you come!);
• End the subsidies to homeowning over renting;
• Cut the deficit by 5 percentage points in 2010 and 2011;
• Cut tax subsidies and raise VAT and excise rates;
• Raise the retirement age to 67 right now;
• Do something to get spending by the Autonomous Communities under control — they recommend Belgium as a role model;
• Fix the damn banks, mostly via consolidation;
• Reform the savings banks, basically by eliminating them as a category.

Sort of like an evil twin version of Wilson’s Fourteen Points. It might even work. But it is a very full menu — the government is being asked to reform basically everything — and it will require a great deal of social solidarity. It is not clear to me that Spain has it. The unions don’t really trust the Socialist Party, and the People’s Party hasn’t been able to resist making political hay out of the eurocrisis. (I mean, really?) It is asking a lot of a government to try to alter the labor market, financial system, pension scheme, tax structure, and federal relations all at once. De tocho, indeed. Of course, presumably the consequences of doing nothing will be worse, but it is hard to sell people on stuff that will make them suffer by using counterfactual reasoning.

That said, Spain is in the lucky position of being able to get rid of its army if need be. How many other countries have gone into fiscal crises with that luxury? Maybe tis time to revisit that old EDC treaty ...

Do tax systems matter? Evidence from Mexico

 Many politicians like to claim that low taxes are good for growth. it is not at all clear that low taxes do anything for growth. What makes me say that? Well, if they were, Mexico should be a powerhouse. After all, KPMG just declared that it had the best tax system in the world, with an overall burden only 60% of the United States and a third of France! So it should be growing like gangbusters, right?

Some argue, sensibly, that low taxes only work when budget deficits are low. Otherwise the beneficiaries of low taxes act as if they have received a tax postponement rather than a tax cut. Anticipating higher taxes (or inflation) in the future, they work less now. The problem? Mexican budget deficits are very low, as are its overall debt burdens.

 

Obviously, other things are going on. But having slow-growing Mexico get the top score for a business-friendly tax system should make one wonder about the importance of tax systems to actually doing business.

Llamamiento a las armas para todos los empresarios de la madre patria

 “They say this is not a crisis, just a deceleration. Deceleration? Let me know where the pedal is and you’ll see how I accelerate it.”

—Paco Fernández, madrileño cab driver

I am a believer in Delong’s dictum about Paul Krugman: “(1) Remember that Paul Krugman is right. (2) If your analysis leads you to conclude that Paul Krugman is wrong, refer to rule #1.” So let me speak as a modest man with much to be modest about: I do not think that Paul Krugman is wrong when he says that no country (and certainly not the madre patria!) can easily force wages down 20% in a reasonable amount of time.

What I want to suggest is that there is a second moving part: productivity. Spanish businesses are remarkably unproductive, and productivity growth has been flat for a decade. Last year, my colleague Diego Comín travelled there to write a case about the country. He asked why productivity was flat, and generally received boilerplate about professional oligopolies, retail regulations, and the high cost of starting a business ... all of which are problems elsewhere in Europe. But he received one very interesting answer from the head of the Comisión de Industria at the Confederación Española de Organizaciones Empresariales: “During the boom, there was no pressure to increase productivity because demand was very high anyway.” After all, building houses better is tough, but why bother when you could sell all you could build at whatever price? Moreover, the massive immigration of the period pulled in migrants who had an overall educational level similar to the native-born, but may have had less tacit knowledge (and, in the case of the 64% not from Latin America, less language ability) and therefore been less productive.

 

The implication is that in the new environment, with profits squeezed and less need to integrate new arrivals into the labor force, Spanish businesses may be able to get a lot more production out their workers. There is a lot of room for improvement. Freeing up labor markets would help, not by allowing for a big drop in wages, but by giving management more leverage to threaten workers and force them to work harder. That is not a good thing, of course, unless you believe in the value of labor for its own sake. But it is a necessary thing if Spain is to avoid an even more painful recession.

And given the low productivity of Spanish businesses, it may be a very possible thing, even without major labor market reforms. In short, the madre patria may be able to pull out of the eurocrisis with only a small  “internal devaluation,” when nominal wages and prices in a region or country drop relative to elsewhere. If Spanish businesses can rise to the occasion, then the euro will be more robust than we may imagine.

Am I underestimating the productivity challenge facing Spanish business?

Ai spic inglich gud

 English spelling is very difficult. So, as my friend Helena Lellis has discovered, the language metamorphosizes in ... uh ... interesting ways when it hits Portuguese.

 

Now, Spanish and French spelling are not that difficult, so misspelling every single item on the menu was quite the accomplishment.

 

Of course, it isn’t clear that Portuguese spelling is all that easy either:

 
Bienvenidos al régimen de nuestros futuros jefes supremos brasileños.

German public opinion needs to get over itself

 I've already mentioned how German public opinion about the economic crisis in southern euroland annoys me. “Poor naïve Klutzes” my foot. The truth is that Germany has greatly benefitted from being able to force its eurozone partners into a monetary policy that generated speculative bubbles and drove up their price levels. A nice essay on the topic can be found here.

One thing that I do not understand are the strange allusions that Germans might benefit from leaving the eurozone. Their exchange rate would rise, making their exports uncompetitive and reducing the value of their substantial holdings of foreign assets. I suppose that those assets, denominated in euros, would be a bit safer at the new values ... but I am still not seeing it.

I do not know if Spain can survive inside the strictures of the eurozone. I suspect that it can, but I do not know. I certainly am beginning to revise my priors on the worth of the single currency. That all said, I still find the sanctimonious German attitude most annoying. The bailouts will not cost the German taxpayer a nickel, the PIGS will be forced to reform their labor markets, and Germany will continue to enjoy the benefits of export competitiveness for several years to come. The worst thing that could happen to Germany would be slightly higher inflation ... and that would be a good thing for German pocketbooks, if not for Germany’s pathological public opinion. I mean, when the head of the Austrian central bank calls German inflation fears “hysterical,” then something is wrong.

The madre patria is in serious trouble

 I find the German response to the euro crisis irritating in the extreme. German taxpayers will not lose money in providing support to Greece, even when the inevitable haircut comes along. German exporters benefit from the eurozone. Avoiding competitive devaluations is a good thing; the single market is (I believe) unsustainable in the long-run without exchange rate stability. Etcetera. Sanctimoniousness gets you nowhere; they have become a country of Alfonse D’Amatos.

Truth is, the fiscal problems of the eurozone are small beans. They would be there even with flexible exchange rates, and Germany would still be making the (repeat: profitable) loans needed to tide the southerners through. See Mexico 1995.

But there is another truth, which is that Spain is in serious trouble. Why? Simple: wages far outran productivity over the past decade.

A bit more detail: Spanish wages are set under the 1980 Worker’s Act. Bargaining generally takes place at the industry and province level, with agreements covering all of a province’s firms in a given sector. (The provinces are smaller than the “autonomous communities,” which are what most foreign observers probably think of when they hear the word “province.” They’re the rough equivalent of a U.S. county, with the municipalities being more like eastern townships.) Such agreements cover about half the labor force; another quarter are under industrywide agreements negotiated at the national level. Details here.

Industrywide negotiation is already a problem. High-productivity firms like generous agreements, since they hobble the competititon. Low-productivity firms might prefer to negotiate on their own, but once they get locked in, they have less incentive to fight a generous agreement since they know that their competitors (good or bad) will be equally disadvantaged. Worse yet, if no agreement can be reached, the existing agreement (along with its escalator clauses) is automatically extended ... about a third of the labor force is covered by agreements that effectively last more than two years.

Labor economists have found (and found again) that completely centralized national wage bargaining often leads to wage restraint. So does decentralized firm-level bargaining (or, more accurately in the American case, an almost complete lack of collective bargaining). The worst outcomes appear in Spanish-style half-centralized systems. The (unsatisfying) explanation is that a national labor union internalizes some of the problems of national industry: killing troubled firms to benefit good ones does not benefit them.

In short, Spain is neither Florida nor Sweden. When there is a shock to Florida’s economy, wages plummet because workers are powerless. (Real wages fell 2.5% in 2009.) When Sweden has a shock, the unions (thinking nationally) accept wage restraints. Spain, neither.

Which means that it is going to be tough push wages down enough. In fact, it will be tougher, because Spain has such high levels of personal indebtedness: grinding wages down will smack Spanish banks right in the face ... and by extension the foreigners who have lent to them. (See Felix Salmon for more on this point: private debt is as big a problem as public debt.)

Now, Spain can adjust. But it will be hard. It would be nice to see the E.U. seriously thinking about the problem. Instead, we have posturing Germans. I am much more sympathetic to the Spanish governments ranting about speculators, because the truth is that Spain can bring its public debt into line even if growth grinds to a halt. But growth grinding to a halt is a bad outcome. Breaking up the eurozone still looks like a worse one, so in the absence of any kind of collective spirit, a grinding painful lost decade is what we are going to get.

Unless we grind along too long and a Spanish government decides that leaving the E.U. is a better option ...

Philippine election postscript

 (A) The election in Lanao del Sur (where the shootout happened) has finally been declared a failure, largely I suspect because the video went viral. 

(B) Erap (Estrada) is making noises about fraud. Just because they are opportunistic doesn’t mean they are wrong. But I suspect that even if they are right, they won’t generate enough furor to challenge Aquino’s win.

(C) I forgot to mention that when I asked most interviewees what they hoped would change as a result of the elections, they said an end to the economic crisis, in particular lower food and basic good prices. One person has related a story of US AID dogfood mixed with dirt being served in hard hit indigenous communities a few years ago. Poverty sucks.

(D) Spent last day in urban garbage scavenger communities, near Smokey Mountain 2, interviewing Bayan Muna activists. Big fear of evictions and typhoons. Bayan Muna gets its political leverage in Manila slums by offering secure titling. Urban pigsties are the savings accounts of choice, holding up to ₱10,000 per pig in porcine wealth.

Erica Field has an interesting paper on the returns to slum titles. Using data from Peru, she finds that titles increase investment in slum housing, but not because they slumdwellers get more access to credit. Rather, it seems to be due to a lowered fear of eviction.

(E) My earlier post on coercion as a general purpose technology was unclear: I just meant that when there are men with guns in play, they can get used in unforeseen ways, like the local Chamber of Commerce being able to threaten violence.

(F) Apparently one of the only ways of distinguishing the military from the NPA in the countryside is that the latter wear crocs instead of military boots. Who would have thought those hideous pastel sandals would be insurgent footwear of choice?

The Autonomous Region of Muslim Mindanao

 Here are some final comments about the Philippine election. Thank you, Noel!

NOEL: I certainly hope you become a regular here, Suresh! So does at least one reader. It isn’t like you don’t have a lot to say ...

This crazy electoral gunfight video is from the PIOM delegation to the Autonomous Region of Muslim Mindanao (ARMM). Somebody tried to expel partisan poll watcher, which started a fight. Guns were whipped out, shooting started, and one person was killed due from shrapnel. (No one seems to have been directly shot.) Strangely, somebody hauled off a PCOS voting machine during the melee.

Apparently, Comelec doesn’t use the term “electoral violence” to describe violence during elections in the ARMM, because it’s between rival families and clans. But the report of the PIOM team that went there was an endless litany of very bad things: Election workers not even showing up to some very large precincts. The rejection of electronic voting refused because of fears that the immediate public tally would prompt violence. Election fixing — one candidate received ₱20,000 to drop out of the race. Seals broken on the electronic ballot boxes. People taking money on their way into the voting area. Hell, snack distribution by one candidate triggered a fight, and 3 bombs went off in other polling areas ... thankfully, nobody was hurt.

I don’t really understand the situation in the ARMM, but that’s gotta be a textbook case of elections in a weak state. Interestingly, the area where the videoed gunfight broke out is still counting votes, indicating that the election is NOT considered a failure.

U.S. troops have been deployed in the ARMM to hunt down Abu-Sayyed, including the creation of military outposts. It may not be a stretch to think of ARMM as a Latin American country, albeit with its own unique Islamic blend of U.S. military bases, bullets and ballots that created such problems in Colombia.

Our final PIOM report and other stuff can be found here.

Coercion as a general-purpose technology

 One of our delegations reported in with a picture of a letter from the Bicol Business Council that said, “We know you are financed by the NPA. Stop working with them or else. We know you have a family.” Not exactly a friendly reminder from the local chamber of commerce.

I’m reminded of a conversation with Jim Robinson where we discussed the idea of coercion as a general purpose technology. No matter the reason you put men with guns on the ground, they can be used for lots of things, including the interests of the local elites.

That is why counterinsurgency is so dangerous. The strategy entails the increased use of troops and intermixing them into everyday life. Unless the troops both fully understand the local situation and are truly impartial, canny locals can often get them to do their dirty work for them. The flip side is even more dangerous. When the official forces possess limited local knowledge, the temptation is huge to empower and legitimize private armies raised by local landlords to “keep their land values high peace.”

Hacienda Luisita

 One group went to Hacienda Luisita, which I blogged about earlier as owned by a clan connected to Aquino and embroiled in the violent killing of striking workers.

Interestingly, a bunch of voting machines all coincidentally failed at about 12:58pm, and were still not working as of 3:45 pm. The Hacienda is 6,000 hectares and encompasses multiple barangays, but, interestingly, this economic power did not translate into an overwhelming vote for Aquino. Some labor union leaders were told “If Noynoy wins, you better watch out.” The union recognized that if Aquino won, any hope of legal redress or land reform of this hacienda would go out the window. It seems that it was strong enough to convince its members to vote against Aquino in numbers large enough to swamp the mysteriously failing voting machines. 

We have been told that the source of the 2004 labor conflict was an attempt by the Luisita management to rezone the area in order to escape the land reform law. They bundled shares in the Hacienda with their labor contract, so that their employees were actually counted as owners. Therefore, they were not eligible for land reform under the Comprehensive Agrarian Reform Program. Genius!

Bad representation, proportional representation, and military persecution in the Philippines

 The Congress of the Philippines, like the American one, is divided into two houses. The upper house, like the American one, is elected in a crazy way. It’s a different form of crazy, though. Every three years, half the 24-person Senate is elected at-large, with all the problems that entails. At least now there’s a ballot, instead of having people write in their favorite candidates.

The lower house is elected by a combination of first-past-the-post and proportional representation. The districts are pretty straightforward, although their populations can vary wildly between 1,559,641 people in the 2nd district of Quezon City, with a few as small as 50,000. Why the disparity? First, the constitution mandates that each province receives at least one district. Second, there hasn’t been any redistricting (other than the creation of new provinces) since 1987. The reason for the latter is left as an exercise for the reader.

Dakilang Isagani, Mapa na nagpapakita ng populasyon ng mga distritong pangkonggreso, ayon sa resulta ng bilangang isinagawa noong Agosto 1, 2007 at inilathala noong Abril 2008, Wikimedia Commons.

Voters get to cast a second ballot for a political party. The parties will divvy up 20% of the House seats, with two caveats: to get a seat, a party needs to get at least 2% of the national vote, and no party can receive more than three seats. In the 2010 election, there will be 219 districts and 54 party-list seats. The party-lists are decided by such narrow margins that they don’t release the results until all the precinct votes are in.

 
The above is an Armed Forces flyer reading, “Don’t vote for the NPA party-lists,” followed by a list of organizations, including one we talked to earlier. One thing that came out of our interviews is that the military seems to target party-list candidates, who are more progressive on average. I wonder if this is a tragic real-world test of the hypotheses (made by many people, but here is a paper by Iversen and Soskice) that proportional representation is better for pro-redistribution candidates. After all, why else would repression be targeted against the candidates that win the PR seats?

Post Election notes

 Today I’m heading back to Manila to compile the report with the other PIOM delegations, and then returning to the U.S. on Sunday. I don’t think there was any national-level credibility-shattering fraud. We observed fairly placid polls, at least by Philippine standards. The people I’ve talked to so far report the same. So far, the press seems to be corroborating my own observations.

 
There have been incidents of post-election violence. A bit north of here, in Mindanao’s Compostela Valley, its terribly unequal plantation belt, NPA guerillas killed 4 soldiers and 2 poll workers who were transporting memory chips. Call it the AES-era analogue of burning a ballot box. I’m curious if there anything particular at stake in Maragusan, or if the attack was simply an NPA show of force.

We’ve been hosted by a Philippine NGO, the People’s Movement for Change, or Pagbabago. I asked them what they thought about the election. Firstly, they believed the Aquino victory was anticipated. Second, Arroyo is going to retain substantial power, in part through her appointments to the judiciary and in part by the fact that her allies will likely retain control of Congress.  They also think that U.S. backing of Aquino was key to the outcome. That came as a surprise. They claimed (IMHO plausibly) that the U.S. Embassy set up meetings between Aquino and various domestic and foreign players, which secured the funds and vote banks needed to cement victory. It is true that the candidates regularly met Embassy officials.

If the national election outcome was foreordained — and if little substantive is likely to change with the new administration, given that its social base is basically the same as th old government   — then what is the point of monitoring the polls? The best answer is that there is value in documenting all the pre-election nastiness that goes down out the rural areas. Hopefully, it will draw international attention to the intimidation that routinely occurs in non-election times.

Anna Gelpern makes the case for optimism

 I met Anna Gelpern at a conference on sovereign debt held at American University in Washington, D.C. She is one of the smartest people I’ve had the honor to meet, so when she writes that the giant E.U. move towards federalism makes her believe that Greece can avoid default, you should listen to her. Albeit not about the weather.

Thing is, the numbers for Greek debt dynamics are still pretty damn grim, almost as grim as the weather that day in D.C. If growth doesn’t materialize by 2012, all bets are off.

Notes on poll watching

 I still haven’t seen the news. (I’m out in the sticks without internet; Noel is getting these posts third hand, in a process involving scrawled missives, motorcycles, and carrier pigeons.) But here are some observations on the poll watching and interviews around Santa Cruz.

Long lines. One booth had a voting machine breakdown for 3 hours, others were just plain backed up. But people were waiting up to 5 hours to vote. The election has the flavor of a festival, with people hanging around long after they’ve voted to meet extended family.  So people just take whatever time they need to complete this most important of political rituals. I.e., I don’t think turnout was much deterred by the long lines.

Lots of flagrant rule breaking. Like party workers (called poll watchers) in the voting area, helping people fill out their ballots and enforcing the 3-kg of rice/100 pesos-per-vote contracts that are a guilty secret for many people here. The local police vests had a candidate’s name “Dockie” printed on it, who also happens to be the vest supplier. Also, many people missing from the rolls, finding that they had “already voted” or unable to find their name (and finding the names of long dead relatives) on the voting lists.

Nonetheless, overall impressions of the election were optimistic. This turned to frustration over the course of the day as the lines and crowded rooms took their toll. At the end of the day, two out of five machines in my precinct failed to electronically transmit their votes; the chips were sent to the municipal canvassing office. 

While our small group, by the nature of our task, is hyper sensitive and paranoid about possible electoral chicanery, I think this is as good as it gets in rural underdeveloped countries. The bubblesheets were certainly an improvement over the old Senate ballots, which involved writing in the names (or nicknames) of the preferred twelve candidates, with all the room for fraud that implies. The local canvasser told another group member that this was the best election he’s seen in 35 years.  

A Randy McDonaldesque post

 Randy McDonald has a great blog. I have only one criticism: he tends to try to relate every story back to something in Canada. Sometimes it works, but sometimes it makes no sense. Thing is, it’s usually a justification to ask his readers about their home countries, and as a rhetorical trick, it’s pretty effective. 

So in the spirit of the kind of discussion he has on his blog, I draw your attention to this post about Askers and Guessers. (Hat tip: Kevin Drum.) It points up a big divide in American culture as it currently stands. Text below the fold:

Political dynasties

 I asked the new mayor of Davao, who is the daughter of the old mayor (and new vice-mayor) what she thought about political dynasties, given that the Philippine constitution has a clause authorizing Congress to legislate against them. 

She said: (a) well, anyone can run in the election and (b) you have George Bush 1 and 2, no? Sigh.

The electoral left and the insurgency in the Philippines

 Just met with Joel Virador, an ex-congressman now running for city council in Davao. While a congressman, he was charged with participating in the armed struggle, which was kind of crazy given that he was in Congress when the supposed acts occurred. This is a recent tactic of the AFP; charging leftist activists and politicians (I’ve met 3 that are on the run from the army here in Mindanao) with “frustrated murder” and participation in the NPA, a designated “communist-terrorist” organization. Once so charged, they become subject to Oplan Bantay Laya 2, a counterinsurgency program explicitly modeled on the Phoenix Program used by the United States in South Vietnam between 1967 and 1972.

Oplan Bantay Laya 2 divides military operations into four stages: military operations to “clear” the area of insurgents, “hold” the area by forming paramilitary groups and an intelligence network; “consolidate” the area through civic action operations such as medical and dental missions; and “develop” the area by introducing livelihood and development projects. 

The difficulty of reconciling the first two phases of the counterinsurgency plan with electoral democracy is obvious. As the counterinsurgency program gets more muscle, the left takes a beating. In Negros, the results have been horrifying. It is notable that, at least of the admittedly select folks I’ve met, none have repudiated the NPA or condemn them. Despite the personal (one guy is dealing with a slew of health problems) and political costs these courageous people have borne by being tarred with the “insurgent” label, they refuse to condemn the NPA or sanction government counterinsurgency programs.

The problems of Philippine democracy, though, go beyond military abuses. Discussing politics with Jose has been confirming my working mental model of the effects of persistent inequality, probably mathed up best by Acemoglu and Robinson. (My co-blogger has written a little about similar models, although mostly in non-democratic contexts.) It postulates a clientelism trap, where elites control votes via their control over key economic assets, and then use that vote bank to stymie any (political or economic) redistribution that would threaten the value of those assets. Land reform, foreign debt repudiation, tax enforcement, and urban infrastructure development all fail in the Philippines because Congress is filled with the rich, who realize most of these programs will eat the flow of rents they enjoy from their assets. It’s simple, pessimistic, and maybe a bit left-wing, but that does not mean it is wrong.

Styles of repression, repression in style

 Counterinsurgency is a strange branch of military operations. The New York Times recently published an article suggesting that the overuse of powerpoint presentations was hurting the American war effort. Well, the Philippine military has developed a somewhat more “productive” use of the technology. One favored tactic by the AFP is to force poor people to watch anti-communist powerpoint shows, countering the Communist Party of the Philippines and the New People’s Army (NPA) ... and by extension progressive movements, leftist party-lists, and labor unions. Besides the clear human rights violation presented by forcing people to endure powerpoint presentations, this reminds me of the tactics employers use in campaigning against union-recognition elections in the United States. 

There is a longer meditation here on the political use of sovereign power. Sovereignty implies a state has control over people in its territory, just as private property and the labor contract imply the boss has control over people in his firm. If there’s interest, I’ll write it. Right now, I just wanted to point out that terribly non-democratic practices work even in the absence of outright fraud and the presence of the secret ballot.

Four out of nine ain’t bad

 So it’s Elena Kagan. I’m not going to get into the merits; I’m not particularly bothered. I’m much more bothered by the Attorney General’s statement that we need a bill relaxing Miranda rights. That said, there is something very important about the appointment: for the first time, we will have four justices from four boroughs: Elena Kagan (Manhattan), Ruth Bader Ginsburg (Brooklyn), Antonin Scalia (Queens), and Sonia Sotomayor (the Bronx). Not only that, but all four of them have New York accents.

Note the way Ms. Kagan pronounces “thought.” Most excellent. Ms. Kagan grew up on the Upper West Side. Aged 50, she may be the last generation of children from that area to possess a distinctive New York accent of the older type. You can still hear the modern type in and around Manhattan Valley, but even there it is fading out in favor a more generic Northeastern accent.

Yeah, that’s Manhattan Valley in 1899! Somebody needs to add a soundtrack.

Now it gets interesting

 I’m on a plane to Mindanao, which IMHO is the most interesting large island in the Philippines. Mindanao’s real estate is parceled up into local landlord fiefdoms (most notably the Ampatuan clan in Maguindanao), Dole banana plantations, Aussie mining companies, a large autonomous Muslim area, and insurgent controlled territory, under both the nationalist MILF and communist NPA. The combination of high stakes and ruthless players makes it no wonder that elections are contested with guns as well as money.

The local elections in the city of Davao seem like an almost stereotypical contest between different clientelist elites. The incumbent mayor, linked to anti-criminal death squads, is attempting to swap places with the current vice-mayor, who also happens to be his daughter. The opposition mayoral candidate is Prospero Nograles, who was chief of staff of the Arroyo administration. The Arroyo administration, I should add, also has their own death squads targeting activists in the area. Charming characters all around. But we will be meeting the two Bayan Muna city council candidates this afternoon. So let’s see what they say. 

Bayan Muna is a vaguely-leftish opposition party founded in 1999. In 2007, the national police arrested Satur Ocampo, one of the party’s three representatives, on murder charges related to the NPA’s execution of three alleged government informers on Leyte in 1984 ... when Ocampo was being held in jail by President Marcos. After an outcry, the Supreme Court ordered Ocampo released. The Arroyo administration later admitted to fabricating the charges.   

The Armed Forces have just been deployed to Davao, after a petition to Comelec by Nograles and another local politico. The official line is that this is to keep things “in order” for the election. But it’s also probably to intimidate people before the election and swing it for the administration. Can the two things be meaningfully distinguished in a place like Mindanao?

More when we land.

“Security by obscurity” in the Philippine elections

 One of the most interesting components of the current Philippine elections is the introduction of electronic voting. (It’s called the “Automated Election System,” or AES in the acronym-happy local idiom.) Instead of paper ballots tallied by hand at the precinct, the AES has people fill out bubbles on a sheet. (This immediately invoked my private traumas with standardized tests.) A computer then reads the bubblesheets and transmits the tallies to the next highest level of vote aggregation. E.g., results from a barangay (probably best translated as “ward”) go to the municipality (actually a county in North American terms), and then to the province and finally the national election commission, called Comelec. The system is intended to stop the long-standing practice of dagdag bawas, literally “add-subtract,” whereby zeros are creatively appended (and other digits somehow dropped) in order to favor particular candidates during the tally. 

All good in theory. But technology alone can’t beat the political animal. The implementation of the vote machines, which are designed by a private company SmartTec, has been ... fraught. It raises a few general questions about technology, democratic legitimacy, and the regulation of public-private partnerships. 

The initial AES law had a number of clauses guaranteeing security of the vote and providing for pilot projects. Comelec has ignored most of these in implementing the AES. For example, Section 12 of Republic Act 8436 (as amended) states: “Once an AES technology is selected for implementation, the Commission shall promptly make the source code of that technology available and open to any interested political party or groups which may conduct their own review thereof.” The idea was that the code could then be stress-tested and debugged by a global army of recreational hackers. Comelec, however, has kept the code under wraps. Not only has it not been made public, it hasn’t even been made available to AESWatch, a highly-qualified federation of local groups! Rather, Comelec outsourced the testing to U.S. companies at a price tag of ₱7 million. Whether this reflects partisan pro-Arroyo bias, institutional politics, or just plain old bureaucratic incompetence is not yet clear to me. The cipherpunks and open source community long ago argued that “security by obscurity” doesn’t work to protect software systems. 

The rub is that voting technology is not just any software system! What elections do (to crib from Jim Fearon) is legitimize a government by making it common knowledge that the ruling group has enough support to take on all comers. Since the technical e–voting issues are beyond the grasp of the general non-hacking public, it is REALLY important that local technical experts, ideally drawn from a broad social base, give the election technology a thumbs-up. This kind of legitimacy is exactly the kind of thing the private sector, however efficient and low-cost, can’t provide. It comes from a social knowledge base of recreational political geekery. In the fraud infested environment of the Philippines (and other developing countries experimenting with electronic voting), everyone is suspicious of the new technology. 

Open-sourcing the underlying code wouldn’t just have helped to insure the elections against nefarious technical manipulation; it would have created legitimacy for the Philippine democratic process V2.0.

Unfortunately, it didn’t happen. Instead, we face the possibility of the “imponderable, unthinkable and unimaginable” should the system fail ... or worse yet, the possibility that the results will be rejected by powerful groups even if it does not.

Things fall apart

 So when I mentioned the “imminent collapse of the Eurozone” my old Army buddy Malachi Wolfe expressed some surprise. “Awww man you're kidding me,” he said. Some academics also seem surprised. When I sent an email around to HBS professors noting this story, a Spanish colleague said, “It’s only one observation. Maybe the manager’s bonus depends on deposits. What bank is it? I’ll move my money into a bank paying four percent.”

Sadly, no. I am not kidding. And while I am going to try to move some money into Spanish banks, I would be lying if I said that I was not nervous about it. 

 

The above are nominal yields on two-year bonds. (The eurozone countries that are not in chart are paralleling France and Germany.)

Brad Delong: “In Europe, the Creditanstalt's bankruptcy and what followed was what turned the recession into the European Great Depression...”

The Portuguese for Creditanstalt is “Instituição de crédito.” A few days ago, events reminded me of 1982, and the onset of the Latin American debt crisis. I am now getting a frightening whiff of 1931. Somebody please tell me why I’m wrong.

Suresh Naidu blogs the Philippine elections!

 I’m Suresh Naidu, a friend and colleague of Noel. I’ll be guest-blogging the upcoming Philippine elections.

 

I’m here in Manila with the NLG component of the People’s International Observers Mission (not as a lawyer, but a fellow traveler). The PIOM is a coordinating group for international election observers, and they are getting us up to speed before sending the 80+ internationals out in teams to various parts of the country on Sunday. (Mine is Mindanao in the south.) 

We’re on day 2 of our orientation, and yesterday we got a rundown on Philippine politics and what’s at stake in this election. Two things that need to be established right off the bat: (A) The Philippines is terribly unequal and poor (ranked 105 in the Human Development Index), with a plantation based agricultural sector and a nascent foreign-owned service economy. (B) The government’s policy options all waft out from a noxious cauldron of repression, foreign debt service, and corruption.  

The standard academic story (which is probably right) is that Philippine politics is a Frankenstein of local clans and patronage networks welded into political machines by national politicians. Local landowners use their economic (and paramilitary) power to secure votes, in the classic Latin American fashion, and then combine these vote banks across clans and coalitions to form national electoral blocs. The result is that virtually all of Congress is landlord (either urban or rural) controlled, and all the presidential candidates come from the same landowning elite. 

Need proof? Imelda Marcos is running for the Congress in her family stronghold of Ilocos Norte, in northern Luzon. Ferdinand Marcos Jr. is running for the Senate, which is elected at-large. Meanwhile, the likely winner of the presidential poll, Benigno “Noynoy” Aquino (son of former president Cory Aquino), is not just the owner of any plantation in Central Luzon ... he is the owner of the Hacienda Lucita, the site of a 2004 massacre of striking workers.

The incumbent president, Gloria Macapagal-Arroyo (GMA as the acronym-loving population has dubbed her), has epitomized the worse features of Philippine politics, being cartoonishly kleptocratic and corrupt. She is also very good at the Philippine political game. She has faced down impeachment proceedings and coup attempts.

GMA managed to get the Philippines branded the most corrupt country in Asia, and her the most corrupt president in Philippine history. (I would still give that title to Ferdinand Marcos.) In addition, she has stacked the electoral body and the Supreme Court with her allies and used the military to persecute the only source of political innovation permitted by the existing institutions: the left-wing party-lists, which contest the 20% of House seats that are open to “marginalized sectors” and elected at large.

In other words, the job of the election observers is cut out for us. Observers are no panacea for the underlying inequality and weak institutions that are the Philippine colonial inheritance. That said, independent electoral observers can improve the electoral process in the face of repression and widespread fraud. While it is a small contribution towards changing the balance of power between elites and citizens in the Philippines ... it is a small contribution towards the only thing that will ultimately allow badly needed reforms to occur.

More reports to come.

Asustado

 OK, now I’m scared. If bank managers are cold-calling small depositors and offering 4% interest to convince them to keep their money in the bank, then Spain has a serious problem.

The worry seems to be exposure to sovereign debt. Or is it? Color me confused. 

“What do the Greek rioters want?”

 Thanks to reader BPH for catching a major bonehead error in comments. The mistake is now fixed. Apologies!

The title of this post is a question asked me today yesterday by a Columbia student Guy Tower. The correct answer is probably, “to express an unfocused floating rage,” followed by “a miracle.” In fact, the last time Amma and I were in Greece, the place had just been hit by riots. That said, there are three possible concrete things that a tear-gas-dodging rock-throwing rioter might actually want the Greek government to do.

  

In order of reasonableness:

(1) Make sure that rich Greeks pay there fair share of the adjustment burden. Sure, taxes amount to only 32% of GDP ... and that assumes that GDP is properly measured ... but tax rates in Greece are not low.  Tax  collection is low. Considering how royally Greek governments have screwed up tax collection, anger at this would get me on the streets too. Raising VAT when you can’t collect a swimming pool tax? WTF? Bring in Crown Agents!

Don’t forget that Greeks are poor. (Albeit not as poor as in the first version of this post! Thanks again to BGH.) The below chart gives the bottom nine deciles of each country’s income distribution, in euros per year at PPP. The median Greek would fall below the Austrian, British, Danish, Dutch, and Swedish poverty lines. They would be in the bottom 30% of the income distribution in Belgium, Cyprus, Ireland, France, and Finland. The lowest tenth of the income distribution is poorer than anywhere else in the Eurozone except Italy, Slovenia, Spain, and a very few Cypriots. 

Source: Tárki European Social Report 2008, Chapter 3. Data from 2005. A larger version of this chart is available by clicking on it.

In short, Greeks have ample reason to suspect that rich people are getting away with murder, and ample reason to be angry about it. 

(2) Push back on the creditors. Yes, Greece has been irresponsible. Hell, it’s been malfeasant. But recent months show all the characteristics of a credit spiral, when bad things happen to good countries. (Or in this case, a badly-behaved one.) If were Greek, I’d want the Greek government to take a harder line with its creditors. Extend maturities, reduce interest payments, basically make ‘em take a haircut. Another way to think about this is that if Greece were a corporation it would be in bankruptcy protection right now. Greece would still need to make budget cuts (its interest payments are lower than its deficit) but they would be less painful and much more politically palatable.

(3) Get out of the euro.

Okay, that last one is crazy. What would Greece need to do to leave the euro? Well, it would have to freeze bank deposits, in order to prevent a flight of cash to the rest of Europe. The problem with that is that doing so would violate European law — Greece would need either a special mulligan from the European Commission (which would set an awful precedent) or quit the Union altogether.

Of course, it is possible that runs on Greek banks will happen anyway. Thing is, the ECB is moving to prevent that, by continuing to accept Greek bonds. Even if the ECB fails, rumors of euro-exit could produce something far worse than bank runs: consider what happened to Argentina in the run-up to its big devaluation. If Greece looked to be reintroducing drachma, nobody would want to spend euros. After all, they’d all be expecting the drachma-euro exchange rate to plummet the second the drachma became legal tender. The economy could go back to barter in the run-up. That happened in Argentina in 2001.

I’ll also add that a devaluation would almost certainly be connected to a default. I’m having trouble seeing Greece suddenly enjoy an Argentine-style export boom without a big drop in the nominal exchange rate. The problem with having a debt burden at 113% is that a big drop in the nominal exchange rate means a big rise in debt burdens, since Greek debts are denominated in euros. Either Greece redenominates its debts — a de facto default, unless the European Court decides doing so is illegal — or it will have to renegotiate them.

In other words, a Greek ejection from Euroland might be good for Greece ... in the sense of being terrible but better than some other possible outcomes ... but it seems to me that it would be rather bad for the rest of Europe. We have, in fact, seen a similar movie before.

Anyway, it seems to me that there are reasons to oppose the current government that go beyond simply wishing for a pony. The 1980s really weren’t really that great a decade. I would like to see more of (1) and (2), with a much more pro-active Brussels. Guarantees for Greek banks would help. (Make ‘em adopt Panamanian banking regulations, and I mean that quite seriously.) More quantitative easing from the ECB. An inflation target of 2%, not just a ceiling. Hell, a target of 3½ percent. British officials running around inside the Greek tax administration. Some of European version of the proposed Sovereign Debt Restructuring Mechanism; e.g., a bankruptcy procedure for E.U. countries.

None of which (except maybe implicit bank guarantees) is going to happen, thanks to Angela Merkel. So unless the Greeks want to flirt with depression and expulsion from the E.U., we are stuck with muddling through. And that means, at some point, a default. 

Good luck, madre patria.

Fail!

Bph catches major bonehead error! HU is not HE. Whoops! Fixed post will come mañana. Thank you, sir, for the catch.

What in the name of democracy ...

 ... went on at those U.K. polling stations where people were turned away? That’s the kind of thing I expect to happen in, well, America. Can any British readers help me out?

Leave Puerto Rico alone

 Puerto Rico has its troubles, but I like the place.

 
Below the fold is the text of H.R. 2499, which just made it out of the House. I am not strongly opposed, but I do not think it is a good idea.

Cowboys and Italians

 I was in Oklahoma to visit the headquarters of Laredo Petroleum, one of the leaders in the development of domestic shale gas and oil. I was also here to visit some of their field operations. I’ll have more to say about that later.

 
The reason why I’m going to wait is that along the way, I discovered something I did not know: southeastern Oklahoma was once a center of Italian settlement. Now, mass immigration this was not. In 1910, the census recorded 2,564 Italians in Oklahoma, with a further 1,303 native-born Italians. That’s a tiny part of a state of 1.6 million. Even in Coal, Latimer, and Pittsburg counties, Italians made up only 3% of the population in 1910. But they left a mark.

 
Why did they come? Well, the aforementioned names of the counties where they settled gives a clue. The first coal mines in Oklahoma opened in McAlester in 1872. In 1875, the mining companies built a labor camp in nearby Krebs. The companies recruited Italian workers in a deliberate attempt to prevent unionization — American coal miners had already become radicalized. In the words of a 1956 article: “Mine operators found the English, Irish, Scotch, and Welsh stock produced the best miners but also produced the chief trouble makers during periods of strikes in the 1880s and 1890s.”

It isn’t entirely clear why the mining companies had to worry. The mines were located deep in the Choctaw Nation. Before statehood, non-Choctaw residents of the area had to pay a residence fee of 25¢ per month (about $77.20 per year in today’s money). The mining companies deducted the fee directly from workers’ pay packets, and arranged with the Choctaws to make it impossible to pay any other way. Upshot: striking workers faced deportation.

Anyway, Italians they recruited, and Italians they came. The first “Columbus Society” in Oklahoma started in 1881.* Unlike most Italian immigrants to the United States, the Oklahoman Italians came from the north: three-quarters of them arrived from Piedmont, with the remainder from Abruzzo and Molise.** The coal mines, then as now, provided grueling employment for $545 per year ... a less-than-royal $12,700 in inflation-adjusted dollars.***  (Then again, the median household income in the tri-county area is only $17,500 today.) Mining conditions, of course, were much worse than the salaries would indicate. Things improved a little with statehood in 1907, when the new constitution provided for workers’ compensation, an eight-hour day, free public schools, and a ban on child labor in the mines.

Nowadays Krebs is dotted with Italian restaurants. But they don’t really serve Italian food, and I’m speaking as somebody who grew up in the land of the calzone and baked ziti. Consider the founding of the oldest of Krebs’ eateries: the famous Pete’s. Pete Pritchard — so named because none of the local kids could pronounce “Piegare” — who moved to the U.S. at the age of 8, in 1903. He attended school only sporadically, since his father had him work in the mines when they needed money, in contravention of the new state constitution. Pritchard broke his leg in 1923, while working in the mines. His wife and he had a small flock of chickens. They couldn’t sell them for any reasonable amount, and they couldn’t keep ‘em, so they served ‘em up to their friends ... and Pete’s was born.

The place became famous during Prohibition for serving home-brewed Choc beer; Pete himself got busted. Choc beer got its start with the European influx, which cheerily ignored the dry laws passed by the Choctaw Nation. An 1894 report written by an irritated Bureau of Indian Affairs official noted: “The sale of Choctaw beer, a drink compounded of barley, hops,tobacco, fishberries, and a small amount of alcohol, is manufactured without stint in many portions of this agency, especially in the mining communities. Many miners insist it is essential to their health, owing to the bad water usually found in mining camps, and they aver they use it rather as a tonic or medicine than as a beverage, and this idea, that it is a proper tonic, is fostered and encouraged by some physicians. But it is somewhat remarkable as a fact in the scientific world that the water is always bad in the immediate mining centers, but good in the adjacent neighborhoods.”

Eventually, coal mining declined. Many of the Italians left. The rest didn’t fully assimilate until World War 2: when the U.S. went to war, the first reaction of the local police was to raid Italian families and seize their weapons. Some people remained working in a giant socialist enterprise. By 2000, the population was down by a third from 1920. (A new hydrocarbon boom has begun, but more on that later.)

We didn’t eat at Pete’s. We ate at Isle of Capri. The restaurants are all basically converted houses, with big and scattered dining rooms bolted on as the customer base grew. It feels a bit like you’re snacking in somebody’s living room. So does the resolute unprofessionalism of the waiters, who were clearly family members, and strange way you pay, by wandering up to the front and asking for the bill, instead of having it brought to your table. (Sure, you pay on the way out at lots of places around the United States, like that diner out in Maspeth. I just don’t remember having to go to the counter to get your bill.) You can get lamb fries (don’t ask, you don’t want to know), ravioli, spaghetti, something called manicotti (I’m still not sure what it was) and sausage sandwiches the size of your head. Given how the restaurants in the area started (Pete was not unrepresentative) it shouldn’t be that surprising that the food bears little resemblance to the American cuisine you’ll find in other heavily-Italian parts of North America, let alone a real genuine Italian restaurant.

 

I ate a lot. Compare the fellow above with same fellow a few hours earlier, as pictured at the beginning of this post. As Italian food, it was awful. As food, it was awesome. If you’re in the area, I highly recommend it.