ALL POLITICS ARE LOCAL, MOST ECONOMIC CRISES ARE LOCAL: LESSONS FROM THE LOWER LATITUDES

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ALL POLITICS ARE LOCAL,MOST ECONOMIC CRISES ARE
LOCALLESSONS FROM THE LOWER LATITUDES

• Paul McNelis, S.J.
• Gasson Lecture
• March 19, 2002

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Keynes, Policy Makers and Academic Scribblers
"The ideas of
economists and political philosophers, both
when they are right and when
they are wrong, are more
powerful than is commonly understood. Indeed,
the world is ruled by
little else. Practical men, who believe
themselves to be quite
exempt from any intellectual influences, are
usually the slaves of
some defunct economist. Madmen in authority,
who hear voices in the air,
are distilling their frenzy from
some academic scribbler of a few years
back... Sooner or
later, it is ideas, not vested interests, which
are dangerous for good
or evil." John
Maynard Keynes
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Escaping Old Ideas
"The real difficulty in changing any enterprise
lies not in developing new ideas, but in
escaping from the old ones."
John Maynard Keynes
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Argentina and Indonesia Similarities

• Strong charismatic leaders after World War II
• Attempt to be non-aligned, find a third way
  between communism and capitalism
• Highly centralized countries, with long years of
  military rule
• Technocratic economic policy Chicago Boys in
  Argentina, Berkeley Mafia in Indonesia
• Argentina typifies the old style crisis,
  Indonesia the new style crisis

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Political TrianglesNon-Cooperative Games Nash
Vulnerability
Nash
ARGENTINA
INDONESIA
Chinese
Agriculture Oligarchy
Peronist Unions
Muslim
Military (till 90) Corporate Elite (after 90)
Military
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Crises and the Global System

• Origin of both types of crises is local, rooted
  in the political history of each country
• Integrated world financial system can certainly
  magnify the effects of a crisis
• Each country is caught in a political triangle,
  with government debt expansion representing a
  non-cooperative outcome
• Continuing Nash vulnerability how to escape
  it?

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Old and New Style Crises

• Old style crisis is about fiscal and current
  account balances, and sustainability of the
  exchange rate. If the deficits are too high,
  sooner or later the exchange rate will crack
• Old Style crisis is there for everyone to see
  crisis event often anti-climatic, a slow
  motion process
• New style is about balance sheets government
  incurring liabilities of the private sector which
  it cannot hope to cover, or cover at high costs.
  Fast action process

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New Style Crisis Vulnerability

• If something goes wrong, suddenly a lot goes
  wrong. Very shaky and non-transparent banking
  system
• Until you step in, you do not know how deep the
  puddle is.
• Japanese banks have lent money to almost every
  losing proposition of the last 15 years. Little
  desire to ask hard questions with their Asian
  clients, especially in South East Asia

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Argentina
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Juan Manuel de Rosas
Birth 1793 Death 1877 Argentine
Dictator. Burial
Southampton Cemetery (Also known as 'Old
Cemetery' Hill Lane, Southampton, England
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HIPOLITO YRIGOYEN

• Founder of the UCR (Radical Party)
• Implemented democratic and labor reforms
• Identified a sense of argentinidad
• "No he venido a castigar ni a perseguir, sino a
  reparar". Rights for labor unions
• Overthrown by military in 1930

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Eva Duarte Peron

• Born 1919 in interior of Buenos Aires Province
• By 15, moved to capital city, became a radio and
  movie actress
• Met Juan Domingo Peron, Labor Minister, at a
  rally for earth quake victims in 1944
• Led the labor fusion for Peron, head of
• Fundacion Eva Peron, de facto labor minster
• Died in 1952

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Juan Domingo Peron-Part I

• Born in 1895
• Educated in military schools
• Participated in coup against Yrigoyen, became
  labor minister in neutral military government
  during WWII, married Eva Duarte, Oct. 22, 1945
• Elected president in 1944 and 1948.
• We are neither Yankees nor Marxists, but
• Justicialistas the third way
• Ousted in coup after Evas death, excommunicated
  from Catholic Church

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Perons Journey, Part II

• Met Maria Estella Martinez, Isabelita, an
  Argentine nightclub dancer, in Panama
• Fled to Spain and Franco, after time in
  Dominican Republic with Trujillo.
• Evas body sent to Rome
• Excommunicated lifted, Peron marries Isabelita
  with blessing of John XXIII
• Evas body found by Peron and taken to his house
  in Madrid
• Lopez-Rega, Argentine magician, becomes
  Isabelitas advisor and body guard in Madrid.

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back in Argentina
Lopez-Rega

• Military government continues, with only a
  short-lived democracy in late 1950s
• Peronists divide between left and right,
  each group visits Peron in Madrid regularly
• Perons made several attempts to return
• Finally Perons return in 1973.
• Peron elected President, Isabelita vice
  president, 1974
• Peron dies in 1975, Isabelita becomes president
• Lopez-Rega becomes advisor, arms right-wing
• Peronists with uzi machine guns

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Dirty War, Technocrats
Martinez-de-Hoz

• Coup against Isabelita Peron by military, dirty
  war begins in 1976
• Martinez-de-Hoz becomes finance minister,
  implements New Orthodoxy with Chicago Boys
• Exchange-rate based stabilization policytablita
• Fast liberalization of current account shock
  treatment.
• Slow fiscal adjustment, high prices, a major
• Crash in 1982, Malvinas war ends military rule
• .

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Heterodox Shocks, and Convertibility Plan
Alphonsin

• With new democratic government of UCR Alphonsin,
  heterodox stabilization plan
• Switch to new currency, exchange rate
  wage/price freeze, intended to make inflation
  more responsive to cuts in demand
• Early success led to lax fiscal stabilization
• Plans crash, Menem assumes office early,
• Cavallo implements convertibility plan

Cavallo
Menem
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Collapse of Plan

• Recession after the dollar appreciates in world
  markets after 1995
• Radical de la Rua elected President, continues
  with convertibility, recalls Cavallo as Finance
  minister
• Recessions becomes more severe, de la Rua
  resigns, Peronist opponent Duhalde becomes
  president
• Menem waits in the wings to run again

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Argentina Real GDP Per Capita
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Argentine Annual Inflation
Heterodox Plan
Fall of Military
Convertibility
Return of Peron
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Argentine Fiscal Deficit ( GDP)
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Indonesia
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Dutch Colonialism

• Differences with English and Mediterranean
  Colonialism Dutch just wanted to make money!
• In 1938 one school of tertiary education for
  every 62,000 Indonesians, in Philippines, ratio
  was 1 to 1500
• Divide and conquer approach segregation of
  ethnic Chinese, pribumi, and bules
• Only a small fraction of population literate
  after 300 years of rule 10 literacy rate.

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Independence Aug. 17, 1945

• Ambiguity of President Roosevelt proud of
  Dutch ancestry, admirer of Queen
• General Marshall encouraged a peace process when
  Independence declared
• Republic forces in Yogyakarta, Dutch in Batavia,
  now Jakarta
• Dutch overplay attack on Republic, but their
  weapons bought with Marshall plan money.
• US embargo till 1949 against Holland
• Dutch kept New Guinea

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Indonesian Leaders, 1945-2002
Sukarno
Widjojo Leader of Berkeley Mafia
Megawati
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Pancasila
Sukarno and Hatta

• One God Almighty (not Allah)
• Human Dignity
• Unity of the Republic
• Democracy
• Equal justice for all -- neither Islamic Law nor
  separate Islamic courts for Muslim offenders

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Political Dynamics in Indonesia under Bapak
Bangsa Sukarno

• Three players nationalists (PNI), Islamic
  parties (NU) and communists (PKI)
• Military PNI, but Air Force had PKI sympathy
• Tensions toward separatism by oil and resource
  risk outer islands ( Shiite Aceh in Sumatra
  traditionally wanted independence and nationhood)

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Sukarno US Visit in 1956

• Televised speech to US Congress, great rhetoric,
  charmed nation and US press
• Kept waiting by Ike at White House because
  Sukaro had PKK members in his delegation
• Upset at American hospitality in final interview
  not Acehenese, not provided a woman and
  accepted as a relative.
• After US visit, declared a state of guided
  democracy in Indonesia

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Political UndercurrentsBandung Conference of
1956
NAM Non-Aligned Movement
Tito
Nehru
Nasser
(Egypt first country to recognize
Indonesia, Nationalized Suez in 1956)
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Dulles Brothers and Sukarno
Allan Dulles
John Foster Dulles

• To be neutral was immoral to Dulles brothers
  and US administration
• Indonesia recognized Red China, took aid from
  USSR, said no to SEATO
• CIA Plan to Balkanize Indonesia thwarted by
  Filippina bar girls network
• American bomber pilot, Alan Pope, released in
  61, after capture in 1957, to new President
  Kennedy, with a request for a good will visit by
  Marilyn Monroe

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Dutch New Guinea Crisis

• Visited JFK in 1962, warmly received
• Near war over Dutch New Guinea
• Bobby Kennedy visited Sukarno to resolve
  situation, and send Peace Corps to Indonesia
• Sec. State Rusk supported Dutch, Bundy at NSC
  supported Indonesia on New Guinea
• Ellsworth Bunker mediated transfer of Dutch New
  Guinea in Middleberry, Virgina

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New Crises Viet Nam and Malaysia

• Sukarno came out against LBJ on Viet Nam
• Opposed formation of Malaysian Federation by
  British, wanted small independent states quits
  United Nations
• Looked to a wider republic including
  Indonesia, Malaysia, and Philippines
• Maxwell Taylor visited Sukarno to cool off a
  war over Malaysia

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Internal Crises, Growing PKI Strength

• Formed NECO --alliance with China, N. Viet Nam,
  N. Korea
• Purge of US-trained academics at universities
  (Berkeley Ph.Ds.), AFS students at universities
• Land Reform led to confiscation of land from
  village Islamic schools, called pesantren
• Formation of a 5th Armed Force, Air Force ranger
  batallion, sympathetic to PKI
• Nationalization of more foreign firms

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Falling into Chaos 1965

• By now, Indonesia is ranked the lowest in per
  capita income of all Asia
• Inflation reaches 650
• Suharno goes to Japan, returns with 18 year old
  Geisha as his latest wife, Dewi.
• Many old friends are accused of being CIA.
• Sukarno withdraws Indonesia from the UN

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Sept 30, 1965

• Assassination of 5 generals, escape of Suharto
  and Nasution, whose wife and daughter killed
• Suharto rallies loyal troops, PKK 5th Force
  surrenders, General Dani of PKK still in prison
• After burial of Nasutions daughter, purge of
  PKK begins by student groups armed by Suharto.
  Estimates still vary of numbers killed during
  Year of Living Dangerously, 1965-66

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New Order BeginningBapak Pembangunan Suharto

• Sukarno under house arrest at Presidential
  Palace in Bogor, gradual Javanese transfer to
  power, Sukarno dies in 1970
• Suharto is de facto President in 1966.
• Berkeley Mafia installed in ministries
• Debt forgiveness cheerfully accepted by US,
  since Soviet Union was largest creditor!
• Pro foreign investment Freeport comes to Irian
  Jaya (formerly Dutch New Guinea)

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New Order Growth and KKN

• Success in terms of inflation and growth 5-10
  solution
• KKN and Ibu Tin the other 10 solution
• Massive capital inflows
• Deregulation of banking, no separation of bank
  and firm ownership
• Diversification away from oil to manufacturing
  exports NIKE footwear
• Ethnic Chinese-Military bargain triangle of
  Muslims-Chinese corporatists-Military

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New Order Foreign Policy

• Ford/Kissinger approve annexation of East Timor
  at end of Viet Nam war
• Continues with NAM, but starts APEC and ASEAN,
  economic cooperation instead of military
  alliance, accepts World Bank aid
• Criticism of Carter administration over human
  rights, low tolerance of dissent.
• Anger at Reagan over Law of the Sea reversal,
  works out special understanding

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Kris Mon of 1997 and End of New Order

• Monetary crisis exposes rot of the domestic
  banking system
• Protests by students against Suharto lead to his
  resignation in 1998
• Habibe becomes president, calls for plebiscite
  in East Timor, massive slaughter
• Habibe defeated by Gus Dur, Dur soon impeached
  and Megawati becomes President
• Tommy Suharto jailed for corruption

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Javanese WayangHukum Karma

• Student groups, which protested and purged PKI,
  led to Suhartos own undoing
• Suharto kept under house arrest at end by
  Sukarnos daughter, Javanese Hukum Karma
• Recovery is fragile, but under IMF guidance,
  bank deposits are guaranteed 100 but there is
  still little supervision
• Zombie banks are a ticking time bomb
• Decentralization issue for fiscal reform

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ICMI Growing Islamic Pressure
Amien Reis, Speaker of Parliament
Indonesian Center for Muslim Intellectuals Muhamm
adyah movement Technology and the Koran
ISLAMIC LAW imposed in Aceh, creation of
religious police, Departure from the
Pancacilla. Major religious warfare in Ambon
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Indonesia Per-Capita GDP
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Indonesian Illiteracy Rates
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Indonesian Fiscal Deficit GDP
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Monetary Policy and Exchange Rates Pre and Post
Kris Mon
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Exchange Rates Pre Kris Mon
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Interest Rate Adjustment
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Annual Inflation
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How to Escape Nash Vulnerability?

• Asian way is evolutionary, with consensus,
  except when things get bad!
• Western way is legalistic, institutional
• Traditional IMF/World Bank Agreements with
  unenforceable conditions will not work in this
  culture
• Nor will external criticism lead to
  cooperative outcomes
• Early warning signals from external creditors on
  vulnerability may help, if done diplomatically