Author: Mlada Bukovansky

Social Construction and Deceit

I’m fascinated by the narratives of the financial crisis that basically cast it as a mass deception. Clearly we need to develop a scale of deceptive practices and think about how this all relates to the social construction(s) of reality(ies). At the simple end there are the flat-out lies, for example those told by the peddlers of certain types of mortgages, but things quickly get more complicated. There are the accounting tricks used by big banks to understate their risk exposure (for example, a Wall Street Journal headline on April 9, “Big Banks Mask Risk Levels”, tells much of that story). There are the practices being revealed by the investigation of Lehman’s Repo 105 and related practices, as illustrated in the New York Times April 12 story, “Lehman Channeled Risks Through ‘Alter Ego’ Firm”. And of course there is the unfolding SEC case against Goldman Sachs allegedly “misleading” investors about the quality of securities linked to subprime mortgages, as detailed in yesterday’s Wall Street Joural. But these are surely only the tip of the iceberg.

Beyond and beneath the overt fraud and lying are more insidious forms of deceit, insidious because they are more difficult to pin down and identify as deceptive. There is the deceit lurking in the very complexity of our postmodern financial practices — this is nicely illustrated in an interview by Christopher Lydon of Michael Lewis, who has seamlessly morphed from sports writer to chronicler of the dark side of financial capitalism. On the web-page that hosts the interview (from Brown’s Watson Institute, no less!), there is a great quote from Lewis where he says “complexity becomes opacity.” I would go further and say that deceit comes to lurk in complexity. And at still another level down, there is the Simon Johnson and James Kwak argument in 13 Bankers (a book that has its own website — yikes!) that not only was there regulatory capture of the US government by financial firms, but also ideological capture — the dissemination of a world view. To quote from Johnson and Kwak’s introduction: “No conspiracy was necessary. Even Summers, a brilliant and notoriously skeptical academic economist…was won over by the siren song of financial innovation and deregulation. By 1998, it was part of the worldview of the Washington elite that what was good for Wall Street was good for America” (p. 10).

Shouldn’t social constructivists be all over this stuff? Well, there is the one little problem that if you posit that reality is socially constructed, then how do you distinguish socially constructed and accepted lies from socially constructed truths? Especially if the “lies” are accepted as truths? The way I’ve been dealing with this in my work on hypocrisy (a piece of this work is coming out in Blyth, Abdelal, and Parsons, eds. forthcoming Cornell book, Constructing the International Economy) is to treat alternative “versions” of truth as contending constructions. But I think this sort of washes out the moral judgment that some sort of deception has been practiced, and that deception is wrong. If you cannot evaluate deception against a “hard truth”, then what sort of criteria are available? I’m thinking the Duck might be a good place to fire off that question, though I don’t want the answer to hinge purely on methodological issues. If the financial meltdown was at least partly a consequence of mass deception, then does the issue in practical terms boil down to a question of whether a mass deception is sustainable over time? You could look at money that way, maybe, as a sustainable (usually, though maybe not in Greece right now) mass delusion. So what makes a mass delusion sustainable, as opposed to unsustainable? Actually I’ve now typed myself to the edge of a philosophical abyss but instead of deleting this post I’m just going to post it.


Is Sovereignty the Worst Organizing Principle — Except for All the Others?

The IMF has changed course and legitimated capital controls (under certain circumstances). Former IMF chief economist Simon Johnson (among others) bemoans Greece’s inability to devalue its currency (given that it is locked into the Euro) in light of its balance of payments difficulties:

“If Greece still had its own currency, everything would be easier. Just as in the case of the United Kingdom since 2008, the Greek exchange rate would depreciate sharply. This would lower the cost of labor, restoring competitiveness (as in Asia after 1997-98) while also inflating asset prices and thereby helping borrowers who are underwater on their mortgages and other debts.

But, with Greece and other troubled euro-zone economies (known to their detractors as the PIIGS: Portugal, Ireland, Italy, Greece, and Spain) having surrendered monetary policy to the European Central Bank (ECB) in Frankfurt, their currencies cannot fall in this fashion. So Greece – and arguably the PIIGS more generally – are left with the need to curtail demand massively, lower wages, and reduce the public-sector workforce. The last time we saw this kind of precipitate fiscal austerity – when countries were tied to the gold standard – it contributed directly to the onset of the Great Depression in the 1930’s.”

Countries around the world are responding to the financial crisis by (to the best of their variable ability) favoring domestic industries and abandoning free trade commitments. And the Lisbon Treaty, the latest contribution to the shape and form of the European Union, has, for the first time, added a withdrawal clause — a way to leave the EU. Before, there was no institutionalized opt-out. Oh, and let’s not forget that China’s rise to world power has been accompanied by consistent insistence on the sacrosanct nature of sovereignty. Is this a random assortment of observations?

What if sovereignty is the best international organizing principle we can hope for? The concept itself has evolved, its trappings have varied. But despite that evolution it has proven itself remarkably durable. Despite all the international and transnational institutional innovations we’ve manufactured in the past century or so, and despite all the outbursts of hegemonic pretense, sovereignty keeps coming back. I don’t want to sound like a dull realist saying its all about power balancing in the end. No, sovereignty is an IDEA. An idea that carries a lot of weight, a lot of gravity. And yes, there is a balancing element to it, but not just balance of material power but assertion of distinctiveness, separateness. It is a very compelling idea. Are we stuck with it? Just throwing out some random and maybe obvious thoughts while the other ducks are busy at ISA…


Financial Lobbies and State Capture (or why IPE is now so much fun)

I liked Virginia Haufler’s post on Canadian Banks, and in a related vein wanted to point out some interesting research on lobbying by the financial industry in the US. In a brief about their latest research posted on VOX EU, Deniz Igan, Prachi Mishra, and Thierry Tressel, three IMF economists, basically conclude that the US financial industry has lobbied its way out of regulation.

They note:

“The Lobbying Disclosure Act of 1995 requires lobbying firms and companies with in-house lobbying units to file reports of their lobbying expenditures with the Secretary of the Senate and the Clerk of the House of Representatives. Legislation requires the disclosure not only of the dollar amounts actually spent, but also the issues in relation to which the lobbying is carried out.
By going through individual lobbying reports, we identify all lobbying activities by financial institutions related to the regulation of mortgage lending and securitisation. During the period of the boom from 2000 to 2006, we find 16 pieces of federal legislation aimed at enhancing the regulation of predatory lending practices, none of which ever became law. The amounts spent on lobbying in relation to these laws were substantial and were spent mostly by large financial institutions.”

Further, they find that:

“financial institutions lobbying on specific issues related to mortgage lending and securitisation adopted significantly riskier mortgage lending strategies in the run-up to the crisis.”

This research is a good complement to Simon Johnson’s earlier piece “The Quiet Coup” in The Atlantic online, May 2009. In that piece, Johnson argues that:

“the finance industry has effectively captured our government — a state of affairs that more typically describes emerging markets and is at the center of many emerging market crises.”

The lobbying continues now, as an opinion piece by Elizabeth Warren in the Wall Street Journal on February 9 notes:

“President Obama’s proposals for reform are bottled up in the Senate. The same Wall Street CEOs who brought the economy to its knees have spent more than a year and hundreds of millions of dollars furiously lobbying Washington to kill the president’s proposal for a Consumer Financial Protection Agency (CFPA).”

I’ve been researching global financial regulatory reform (or lack thereof) and teaching IPE, and I am finding that studying IPE today is way more exciting than it once was. There are so many crazy things going on, so many changes, and so much political maneuvering and battle over ideas (Keynes vs. Hayek anyone?) that even the dullest of rational choice theorists and neo-liberal institutionalists cannot kill the fun. One interesting irony is how much of the analytical framework once used to primarily study developing country economies, with its preoccupation with corruption, unsustainable spending, state capture, debt crises, etc., is now applicable to many of the OECD countries! Maybe we’re all developing countries now.


Defining Corruption

So the U.S. Supreme Court has decided that limits on direct corporate spending for political campaigns violate the First Amendment rights of corporations (hey, corporations are people too!). The New York Times has a good overview, plus links to the actual decision. Since I’ve done some work on corruption in the past, and regularly teach a seminar on Corruption and Global Governance, this decision has resonated with me and I can’t help being shaken up.

Let’s consider a commonsense definition of corruption: the abuse of public power for private gain, or the use of private means to shape public decisions so that they conform to narrow private or sectoral interests. The definition depends on our being able to draw a line between public good and private interest. The idea of corruption not only means that it is wrong for public officials to take bribes, but also more broadly that some things, like justice, should not be bought. If money becomes the primary determinant of public outcomes, public trust in governance, the rule of law, and the overall system of justice is corroded. But the primary focus of anti-corruption discourse emanating from the U.S. has been on corruption in the developing world. We consider ourselves to have the most advanced anti-corruption legislation in the world, thanks to the U.S. Foreign Corrupt Practices Act, which prohibits U.S. corporations from bribing foreign public officials. Equating corruption with flat out bribery allows us to ignore the bigger question of the role of money in politics, and especially of private, corporate money. By shaping global anti-corruption discourse to focus on bribery (see the OECD Convention on Bribery) we have managed to generate a relatively “clean” identity for the U.S. (though not entirely so, according to Transparency International’s rankings) and keep the focus on the developing world as the hotbed of corruption. While it would be silly to deny that corruption is a problem for development, the discursive maneuvers emanating from the U.S. prevent adequate reflection on the health of our own political system. The role of corporate money in the U.S. political system was of course already a concern before this latest Supreme Court decision, but even so, the blow that has now been dealt to campaign finance reform (a bipartisan issue, by the way) is staggering. And now we hear the word “corruption” being thrown around a great deal more than usual in discussions of the U.S. political process. So the silver lining may be an increased propensity to reflect on the corruption of our own system, not just on corruption as a problem for those under-developed Others.


Susan Strange was (mostly) Right

I just re-read Susan Strange’s article, “The Westfailure System” in the Review of International Studies 25, 3 (July 1999). In either early 1999 or late 1998 (depending on the editorial schedule of RIS), she wrote:

“I have put the financial failures of the state-based system first because my current research has convinced me that it is the most acute and urgent of the current threats-without-enemies. If we do not find ways to safeguard the world economy before a succession of stockmarket collapses and bank failures eventually lands us all in a 20-year economic recession — as the history of the 1930s suggests it might — then no one is going to be in the mood to worry overmuch about the longterm problems of the environment.”

I doubt she would be rejoicing at the accuracy of her predictions about the fate of the Copenhagen climate talks in the face of the global financial crisis. OK, maybe not a 20 year recession, but the insight is still pretty good.

What I find less satisfying in the article, but only because the argument is only sketchily developed, is her “What is to be done?” section. She asks for the emergence of a viable opposition to the hegemony of a transnational corporate class (TCC), an opposition grounded in “an emerging global civil society”. Not anti-market or anti-business (she draws a distinction between small and medium-sized firms and the TCC), but transcending the state and existing multilateral institutions. She concludes with a message to academics:

“We have to escape and resist the state-centrism inherent in the analysis of conventional international relations. The study of globalisation has to embrace the study of firms no less than of other forms of political authority. International political economy has to be recombined with comparative political economy at the sub-state as well as the state level. It is not our job, in short, to defend or excuse the Westphalian system.”

Go Susan. Which is why the sort of increasingly rare investigative journalism evident in today’s Washington Post story about AIG is worth highlighting — great material for tracing the inner workings of the inciters of the herd, the “animal spirits” in action…
I suspect you enlightened readers of the Duck already know this stuff (Strange herself repeatedly says that the ideas she is presenting are “kids-stuff”), but I would be interested to hear comments on whether the global civil society approach has really gained any traction in the last decade.

A Seat at the Table

In a scathing analysis of the Copenhagen summit, The Financial Times published the following side-bar vignette:

Barack Obama’s meeting on Friday evening with the leaders of the major developing economies was perhaps the most farcical event in two weeks of mayhem. At 7pm, the leader of the world’s biggest economy was due at a meeting with Wen Jiabao, Chinese premier, in a backroom barred off from the rest of the conference with heavy security.

Mr Obama strode in, according to US accounts, discovering as he did so that his planned interlocutor was already there – deep in conversation with Manmohan Singh, the Indian prime minister who, the Americans had been told, had already left. With them were Brazilian president Luiz Inácio Lula da Silva and South Africa’s Jacob Zuma.

The US leader called out: “Are you ready for me?” There was no space at the table, but Mr Lula squeezed round, allowing Mr Obama to pull up a chair and sit down.

I wish I had a video of that. Welcome to the new multilateralism, where the old fiction of developing countries having a seat at the bargaining table has been transformed into reality. Surely this is a good thing?

The FT insinuates otherwise. They compare the Copenhagen process to the Doha round of World Trade Organization talks — now stalled out and unlikely to be revived in the current neo-mercantilist economic climate. Many analysts have blamed the collapse of Doha on both the increased complexity of trade issues, and the increased number of negotiating parties at the table. Basically, when multilateralism comes to mean over a hundred sovereigns at the table, rather than 15 or so who expect the hundred or so others to be too weak to object, it no longer produces meaningful binding agreements. To further quote the same FT story:

According to UN rules, countries must reach a consensus before any binding decision is made. For a climate change agreement covering many complex areas, hundreds of negotiators had to meet in dozens of groups to work on pages of highly detailed drafts.

But once this was under way, the technical meetings did not go as planned. Smaller developing countries raised questions of procedure, repeatedly delaying discussions of the substantive issues. Some reopened discussions on matters others had thought settled. For instance, Tuvalu and several small island states forced a half-day suspension by seeking to make the talks’ ultimate aim a limit of 1.5°C in global temperature rises rather than 2°C – a limit many countries view as impossible to achieve.

As the talks entered their final week, the wrangling grew worse. Australia was to be the co-chair of a group discussing commitments to reduce emissions but needed a developing country partner. Of at least 10 approached, none would do it.

While some of the countries raising objections had legitimate concerns – “It’s hard to argue with people whose homeland is going to disappear”, as one negotiator put it – the effect was a failure to make progress on the formal aspects of an agreement.

So effective were the tactics that some developed countries suspected a co-ordinated campaign, backed by China. China has many trade links with the 130 developing nations in the “Group of 77”, of which it is the most powerful. For instance, the G77 chair is held by Sudan, closely tied to China through investments and oil trade. Lumumba Di-Aping, the group’s leader, was one of the most confrontational developing country representatives, likening the rich countries’ stance to genocide.

By the time the leaders began to arrive last Thursday night, Ed Miliband, UK climate change secretary, was warning the talks were in danger of degenerating into farce. Progress was stalled on substantive issues and the wording of the draft text was still subject to intense quibbling. Hugo Chávez of Venezuela, Evo Morales of Bolivia, and Iran’s Mahmoud Ahmadi-Nejad chose to use their time on the world stage to denounce western capitalism rather than discuss climate change, which did not help the atmosphere.

“Degenerating into farce” is the operative term. Has conference diplomacy ever been anything other than farce? Surely something like the 1814 Vienna Congress is exempt from such a charge? They only had a few great powers to contend with, not demagogues and rabble, right? But I recently read (just for fun) a popular, gossipy account of the Congress (Vienna 1814 by David King) that makes this haloed moment in international history seem just as much a farce as Copenhagen (the full text of the Copenhagen agreement is here).

Of course, the fact that a conference appears as farce does not preclude it having lasting and significant effects. But it is difficult (impossible?) to disentangle those while the initial drama is still reverberating.

Is there a general problem with conference diplomacy? Too many parties at the table? The degeneration of UN conferences into nothing but opportunities to grandstand for a domestic audience? The inability of governments to cope with global problems, combined with their inability to make credible commitments to each other? The nefarious and increasingly powerful influence of China? Does the new clout of countries like China, India, and Brazil undermine progress toward binding commitments? Or is this just an imperialist attitude? Is what we have now Multilateralism 2.0, or is it the same old game, with some new players stepping into old roles? I’m wondering.


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