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Norway goes Keynesian January 26, 2009

Posted by Sverre in : Norwegian politics, Political economy , 1 comment so far

keyneshalvorsenThe ongoing finance crisis has certainly given classic Keynesianism a new boost. And few countries have embraced this as clearly as Norway did today. The center-left government under Prime Minister Jens Stoltenberg from Labour (Arbeiderpartiet) and Finance Minister Kristin Halvorsen from the Socialist Left Party (Sosialistisk Venstreparti) introduced a massive expansion package aimed at combating unemployment.

The package expands the national budget directly with about 2o billion NOK (roughly 2.2 billion € or 2.86 b$), with nearly 17 billions increased expenditure and over 3 billion worth of tax cuts. With secondary effects, the government estimates a total expansive effect of 27 billion NOK, reducing the substantial oil-boosted government surplus. When correcting for petroleum-based offshore income, the government now estimates a government deficit of 119 billion NOK for 2009. This sums up to an expansion of the oil-corrected government budget of 2.3%, substantially higher than the 1.5% goal set by the EU. (more…)

Rethinkning voter rationality December 22, 2008

Posted by Sverre in : Political behavior, Political economy , add a comment

A very interesting paper by Andrew Gelman and a few more, linked to in a post at The Monkey Cage, proved to be very much to my liking. They look at the act of voting from a rational actor perspective, but leave the premise that “rationality” is equal to “selfishness”. That means they give the voter a preference for the good of everyone else, thereby showing that voting can be a rational act.

What’s the logic behind this? Well, if you sum up the benefit every member of society would get from an election outcome, the number could become quite big, compensating for the low likelihood that your vote is the one that will decide. Thus if the cost of voting is rather low, it might still be worth it. This actually sounds rather reasonable. Perhaps voting might be rational.

The perceived benefit society could get from voting is of course limited by how much you actually believe candidates will follow through their policies. Also, the benefit of voting might have to be discounted by a factor reflecting to what degree you believe the election will be fair. This might explain why the big proportion of the voters that don’t participate still aren’t necessarily selfish either.

It gives me solace to know that I now have a scientific vay to explain that people that vote aren’t stupid and people in general aren’t necessarily selfish.

Quick book review: International Migration by Jonathon W. Moses October 3, 2008

Posted by Sverre in : Political economy , add a comment

Title: International Migration – globalization’s last frontier
Author: Jonathon W. Moses
Year: 2006
Publisher: Zed Books, London
ISBN: 1842776592

I read this book as part of the required reading in a course on International Political Economy by prof. Moses, a man I hold in high regard both as a person and an academic. As he’s also the advisor for my master thesis you might question how good idea it is to criticize his work, but to hell with caution. Praise without criticism is boring and without much credibility anyway. Besides I’ve already done this during an oral exam that turned out well, so…

Let me start by recommending this book as a good read. Even though it has its flaws, it’s a thought-provoking analysis of a topic that certainly doesn’t have the attention it deserves in political science. It certainly gave me a lot of new ideas and forced me to rethink my entire conception of migration and borders in general.

Quickly summarized, Moses argues strongly and normatively against barriers to migration. He shows us how the world is becoming more and more globalized in a lot of areas, but how migration has somehow been exempt from this universal trend. He then proceeds along three separate lines of reasoning to explain why this is wrong: morally, politically and economically. Finally there is a chapter in which he challenges the conventional wisdoms on the effects of migration before concluding with a policy recommendation of open borders and broader debates. (more…)

The finance crisis: How can the US Congress do nothing? September 30, 2008

Posted by Sverre in : Political economy, World politics , add a comment

The finance crisis certainly took a turn for the unexpected today when the US House of Representatives turned down the $700 billion rescue package proposed by president Bush. Of course it was controversial for USA to consider this in the first place, given that they have been the largest driving force in pushing the International Monetary Fund to try and discourage other governments from doing the same in times of crisis. Wall Street seems to have expected them to go through with it this time though, as the news brought the biggest plummet in stock prices in American history. So how could they possibly risk the crisis getting even worse?

There are a lot of different reasons, possibly as many as the 227 congressmen that voted against. Here are a few. Off the top of my head I’ll try to point to a few. (more…)

Sex, lies and capital controls – how Mahathir painted himself into a corner August 5, 2008

Posted by Sverre in : Malaysia, Political economy , 4comments

Malaysia was the odd ball out in handling the great Asian financial crisis of 1997-98. Rather than follow the stream and adapt to the measures enforced by the International Monetary Fund, Malaysia’s prime minister Dr. Mahathir Mohamad chose to go in a different direction by imposing capital controls that effectively closed off the Malaysian economy.

A huge amount of work has been produced by scholars worldwide on the crisis. As among others Kishore C. Dash and Rudiger Dornbusch point out, economic factors can explain why the crisis broke out, but the subsequent management on it must also take the domestic political situation into account. Much more accomplished scholars than myself have examined to great length the reasons for the crisis and the results of the choices taken.

What this analysis focuses on is to fill in the picture of why the crisis was handled the way it was, going beyond the macroeconomic arguments. The economy and the currency can be important tools for control and important totems of nationalism. In the attached paper, I show that regardless of macroeconomic concerns, Prime Minister Mahathir Mohammad had based his power on these tools and had all but painted himself into a corner, having no option but to choose the policy he did if he wanted to avoid the risk of serious damage to his regime.

Three steps form a process of elimination by which closing off the Malaysian economy becomes the only viable solution for Prime Minister Mahathir:

Firstly, the possible policy choices were constrained by the Mundell-Fleming conditions, also dubbed the “unholy trinity.” They state that it is impossible to maintain both a fixed exchange rate, monetary autonomy and a free flow of capital simultaneously. Malaysia had still been fairly close to achieving this, but the face of a massive macroeconomic shock made it impossible to keep doing so. A choice about which goals to pursue had to be made

Secondly, Mahathir’s power was strongly dependent on the economic network centered around the UMNO party that constituted the major part of his power base. Abandoning monetary autonomy, with the possibilities of high interest rates sure to hit sub-prime loan markets hard, posed a serious threat to the UMNO business conglomerate. Relinquishing monetary policy control thus seemed difficult.

Thirdly, Mahathir had through his Wawasan 2020 plan emerged on a path to bring Malaysia to become an industrialized nation through a new state-centered nationalism. The currency was a vital national symbol and currency stability was thus also prioritized.

Making the two first options go from difficult to impossible was the the concurrence of a macroeconomic shock and a political crisis in the form of Anwar’s challenge to Mahathir’s rule. With attacks against his power in the elections of 1993 and 1996, Mahathir’s apparatus for autocratic rule was being threatened. Anwar’s advocacy of austerity measures threatened to shake the UMNO patronage system even more strongly.

Constrained by the Mundell-Fleming conditions, the last remaining option was to abandon free flow of capital, which had played a major role in the prosperity of the Malaysian economy to over the last decades. With a considerable distrust towards international markets, this option seemed less unthinkable to Mahathir than to most mainstream economists. Additionally, the policy facilitated both the discrediting of Anwar’s supporters and the possibility to blame domestic economic problems on foreign actors. This explains why Mahathir was willing to go to great lengths to enforce these policies, regardless of the risks (or even predictions of impending doom) stressed by a unitary corps of international economists.

The complete paper, fully referenced, can be found here: sex-lies-and-capital-controls (PDF)