Effective Altruism and mistakes of globalization

Most people in the effective altruism movement are not economic radicals. You’re unlikely to hear them talk about the evils of capitalism, but you’re also unlikely to hear them say that taxation is theft and anarcho-capitalism is the only way to go. Or, as Dylan Matthews once put it:

That lends itself to a particular political bent, which is left of center but technocratic, friendly to markets (when they can be shown to work), and, above all, cosmopolitan… They’re sympathetic to the welfare state but far more jazzed about open borders.

Open borders is probably the most radical political view you’ll regularly hear advocated in the EA movement, but even that can be seen as a logical extension of views about the benefits of free trade that became standard for establishment liberals under Clinton, just applied to labor rather than goods. It’s a view that would have a shot at widespread elite support, if only it weren’t so toxic to the average voter.

I basically share the standard EA view here. My views are left of center, technocratic, friendly to markets, and above all cosmopolitan. Yet lately, I’ve come to see why many people are nervous about this combination of views, particularly the “technocratic” part. Why did my perspective shift? It all started with Greece.

I assume most of my readers know about Greece’s current economic mess–namely, that as I write this, Greece’s unemployment rate is around 25%. I don’t know how many people have followed the economic policy arguments, though. Let me give a short summary.

Normally, a country like Greece would deal with its problems by devaluing the currency. This would be painful, but would boost exports and tourism by making both cheaper, which would in turn bring down unemployment. Greece can’t do this, though, because of the Euro. Greece could solve this problem by leaving the Eurozone, but it hasn’t because lots of people are ideologically committed to the Euro.

The other way to solve this problem is for the rest of Europe to just give Greece a bunch of Euros. This is what happens regularly in the United States to some extent–richer states support poorer states. If unemployment was low in California but at 25% in Alabama, Congress and the Federal Reserve wouldn’t write off Alabama as somebody else’s problem, even if the solution required giving Alabama some money.

But the rest of Europe doesn’t want to do this either. So instead we get demands that Greece basically hand over the running of much of its government to European central institutions. The nicest thing you can say about the policies these institutions have imposed is that they might be sensible under other circumstances, but they have absolutely no chance of getting Greece out of its current mess.

It’s relevant that it’s widely taken for granted that Eurozone economic policies are really set by the richer Eurozone members, particularly Germany. So seeing the Greece crisis unfold got me wondering about other accusations of rich countries having imposed terrible economic policies on poorer ones. Was there any truth in them?

It turns out that among informed people, this isn’t terribly controversial. The answer is “yes”. When I was research this issue, one of the things that sealed it for me was former IMF economist Kenneth Rogoff’s reply to fellow economist Joseph Stiglitz. The reply is bizarrely petulant; a major line of counter-attack is to admit mistakes but then try to shift blame to Stigliz for daring to criticize those mistakes. (It damaged confidence, you see.)

What exactly were the mistakes? Paul Krugman, in his book The Return of Depression Economics gives two main “things the IMF clearly did do wrong”:

First, when the IMF was called into Thailand, Indonesia, and Korea, it quickly demanded that they practice fiscal austerity–that they raise taxes and cut spending in order to avoid large budget deficits. It was hard to understand why this was part of the program, since in Asia (unlike in Brazil a year later) nobody but the IMF seemed to regard budget deficits as an important problem. And the attempt to meet these budget guidelines had a doubly negative effect on the countries: where the guidelines were met, the effect was to worsen the recession by reducing demand; where they were not met, the effect was to add, gratuitously, to the sense that things were out of control, and hence feed the market panic.

Second, the IMF demanded “structural” reform–that is, changes that went well beyond monetary and fiscal policy–as a conditions for loans to afflicted economies. Some of these reforms, like closing bad banks, were arguably relevant to the financial crisis. Others, like demanding that Indonesia eliminate the practice of giving presidential cronies lucrative monopolies in some business, had little if anything to do with the IMF’s mandate. True, the monopoly on cloves (which Indonesians like to put in their cigarettes) was a bad thing, a glaring example of crony capitalism at work. But what did it have to do with the run on the rupiah?

Krugman also writes that “never in history had so many first-rate economists been in positions of so much authority.” So what went wrong? Is modern mainstream economic theory fatally flawed, as some have argued? Krugman has a different explanation:

International economic policy ended up having very little to do with economics. It became an exercise in amateur psychology, in which the IMF and the Treasury Department tried to persuade countries to do things they hoped would be perceived by the markets as favorable.

This analysis foreshadows Krugman’s more recent, more acerbic complaints about belief in the “confidence fairy.”

Krugman’s book makes another interesting point: while most economists at the time (including at the IMF) opposed capital controls, there are still tradeoffs involved in the decision to abandon them. Capital controls have definite costs, but they may be a necessary evil if a country wants both insulation from volatile currency markets and the ability to have a monetary policy (i.e. not end up like Greece).

Joseph Stiglitz, in his book Globalization and its Discontents, goes a little further in his critique than Krugman. Stiglitz is not anti-globalization. He’s clear that trade and markets have lifted millions out of poverty in countries like China, South Korea, and Taiwan. He also criticizes anti-global activists whose agenda involves rich countries strengthening their protectionist policies, something that would almost certainly hurt the global poor (whether those activists admit it or not).

However, Stiglitz argues, it matters a lot how free-market policies are implemented. Pacing and ordering matter. For example, Stiglitz contrasts the bungled transition to capitalism of former members of the Soviet Union–where outside experts pushed for rapid changes, and the result was plundering of national resources by corrupt oligarchs–with China’s slower and more successful transition to more market-oriented policies.

Again, it’s striking how problems were caused not by blind adherence to economic theory, but by neglect of basic economic theory. Here’s Stiglitz on the 1998 Russian financial crisis:

In the weeks preceding the crisis, the IMF pushed policies that made the crisis, when it occurred, even worse. The Fund pushed Russia into borrowing more in foreign currency and less in rubles. The argument was simple: The ruble interest rate was much higher than the dollar interest rate. By borrowing in dollars, the government could save money. But there was a fundamental flaw in this reasoning. Basic economic theory argues that the difference in the interest rate between dollar bonds and ruble bond~ should reflect the expectation of a devaluation. Markets equilibrate so that the risk-adjusted cost of borrowing (or the return to lending) is the same. I have much less confidence in markets than does the IMF, so I have much less faith that in fact the risk-adjusted cost of borrowing is the same, regardless of currency. But I also have much less confidence than the Fund that the Fund’s bureaucrats can predict exchange rate movements better than the market.

The more I read about these issues, the more sympathetic I am to the claim that global development needs to happen in accordance with democratic principles. Sure, voters may not understand the issues as well as professional economists. But voters can, at least, be trusted to care about their own well-being, and the politicians they elect have strong incentives to listen to them.

Foreign technocrats, on the other hand, may be tempted to ignore what they know of economics if it makes them look like responsible adults. Or if it seems likely to protect them against charges of irresponsibility later. Or if it serves the interests of whoever’s paying their salary. At any rate, some of the IMF’s blunders seem unlikely to be ever chosen by a democratically elected government for itself.

Or maybe this impression is misleading. Maybe I’m biased because I live in the United States, a country whose economic policy, if not perfect, has usually been non-disastrous. Maybe if I knew more about the policies of democratically-elected politicians in, say, India, I’d have second thoughts. But I at least understand the apprehension many people have about letting foreign technocrats run things.

I don’t think this is a strong objection to the object-level ideas most popular among effective altruists. GiveWell’s top charities promote narrowly-targeted interventions, not radical and comprehensive economic reform. GiveDirectly, in particular, is about as respecting of poor people’s autonomy as you can get.

Furthermore, I don’t see many EAs arguing that the thing to do to fight global poverty is to push the kind of policy reforms the IMF once pushed. When EAs do advocate for policy change, it tends to be changes to rich country policies, things like open borders. Still, it’s worth, worth being sensitive to these worries, especially as EA explores further into the policy realm.

This also suggests a possible direction for EA policy advocacy: advocacy for making the governance of certain global institutions more democratic. This may well be a pipe dream, but I think it’s worth at least chewing on a bit.

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5 thoughts on “Effective Altruism and mistakes of globalization

    • The problems described in this article are not why Greece has 25% unemployment. They’re problems, but like the Indonesian clove monopoly, they’re not the immediate cause of the current crisis.

      (I could explain more, but I don’t know what level to pitch my explanation at. How much macro do you know? Ever heard the story of the babysitting coop?)

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  1. “It became an exercise in amateur psychology, in which the IMF and the Treasury Department tried to persuade things to do they hoped would be perceived by the markets as favorable.”

    How do you parse that sentence?

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    • My mistake–the result of copying the Krugman quote by hand because Amazon Kindle’s cloud reader makes it hard to cut and paste. Fixed it, along with a couple other grammatical errors.

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  2. Pushing to be more democratic might help, but I gather from this post that you are not familiar with the near (last 50-60 years) history of Latin America. Even the last 5-10 years has some bitter examples of democratic populist leaders ruining their countries economies and deeply improvising their people. And not in surprising ways, when Dilma Rousseff came to power in Barzil recently, she did a lot of things that textbook macro said would hurt the economy, damage its credit worthiness, slow growth etc. She was warned by everyone, did them anyway, and things played out exactly as economists warned.

    Because Europe is closer to the US we see are very familiar with the failure mode there. We are familiar with the failure mode in Asia in the late 90s because that was the precursor to Europe. The typical NYT reader is much less familiar with the failure modes that have happened in Lat Am, Africa, and India. But these are real places, lots of people live there, and the opposite failure modes have been quite damaging to those people.

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