On The Lessons 'Economists' Fail To Learn

Tyler Durden's picture

Authored by Dani Rodrik, originally posted at Project Syndicate,

How quickly emerging markets’ fortunes have turned. Not long ago, they were touted as the salvation of the world economy – the dynamic engines of growth that would take over as the economies of the United States and Europe sputtered. Economists at Citigroup, McKinsey, PricewaterhouseCoopers, and elsewhere were predicting an era of broad and sustained growth from Asia to Africa.

But now the emerging-market blues are back. The beating that these countries’ currencies have taken as the US Federal Reserve begins to tighten monetary policy is just the start; everywhere one looks, it seems, there are deep-seated problems.

Argentina and Venezuela have run out of heterodox policy tricks. Brazil and India need new growth models. Turkey and Thailand are mired in political crises that reflect long-simmering domestic conflicts. In Africa, concern is mounting about the lack of structural change and industrialization. And the main question concerning China is whether its economic slowdown will take the form of a soft or hard landing.

This is not the first time that developing countries have been hit hard by abrupt mood swings in global financial markets. The surprise is that we are surprised. Economists, in particular, should have learned a few fundamental lessons long ago.

First, emerging-market hype is just that. Economic miracles rarely occur, and for good reason. Governments that can intervene massively to restructure and diversify the economy, while preventing the state from becoming a mechanism of corruption and rent-seeking, are the exception. China and (in their heyday) South Korea, Taiwan, Japan, and a few others had such governments; but the rapid industrialization that they engineered has eluded most of Latin America, the Middle East, Africa, and South Asia.

Instead, emerging markets’ growth over the last two decades was based on a fortuitous (and temporary) set of external circumstances: high commodity prices, low interest rates, and seemingly endless buckets of foreign finance. Improved macroeconomic policy and overall governance helped, too, but these are growth enablers, not growth triggers.

Second, financial globalization has been greatly oversold. Openness to capital flows was supposed to boost domestic investment and reduce macroeconomic volatility. Instead, it has accomplished pretty much the opposite.

We have long known that portfolio and short-term inflows fuel consumption booms and real-estate bubbles, with disastrous consequences when market sentiment inevitably sours and finance dries up. Governments that enjoyed the rollercoaster ride on the way up should not have been surprised by the plunge that inevitably follows.

Third, floating exchange rates are flawed shock absorbers. In theory, market-determined currency values are supposed to isolate the domestic economy from the vagaries of international finance, rising when money floods in and falling when the flows are reversed. In reality, few economies can bear the requisite currency alignments without pain.

Sharp currency revaluations wreak havoc on a country’s international competitiveness. And rapid depreciations are a central bank’s nightmare, given the inflationary consequences. Floating exchange rates may moderate the adjustment difficulties, but they do not eliminate them.

Fourth, faith in global economic-policy coordination is misplaced. America’s fiscal and monetary policies, for example, will always be driven by domestic considerations first (if not second and third as well). And European countries can barely look after their own common interests, let alone the world’s. It is naïve for emerging-market governments to expect major financial centers to adjust their policies in response to economic conditions elsewhere.

For the most part, that is not a bad thing. The Fed’s huge monthly purchases of long-term assets – so-called quantitative easing – have benefited the world as a whole by propping up demand and economic activity in the US. Without QE, which the Fed is now gradually tapering, world trade would have taken a much bigger hit. Similarly, the rest of the world will benefit when Europeans are able to get their policies right and boost their economies.

The rest is in the hands of officials in the developing world. They must resist the temptation to binge on foreign finance when it is cheap and plentiful. In the midst of a foreign-capital bonanza, stagnant levels of private investment in tradable goods are a particularly powerful danger signal that no amount of government mythmaking should be allowed to override. Officials face a simple choice: maintain strong prudential controls on capital flows, or be prepared to invest a large share of resources in self-insurance by accumulating large foreign reserves.

The deeper problem lies with the excessive financialization of the global economy that has occurred since the 1990’s. The policy dilemmas that have resulted – rising inequality, greater volatility, reduced room to manage the real economy – will continue to preoccupy policymakers in the decades ahead.

It is true, but unhelpful, to say that governments have only themselves to blame for having recklessly rushed into this wild ride. It is now time to think about how the world can create a saner balance between finance and the real economy.

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buzzsaw99's picture

drivel. the world has nothing to do with decisions being made.

Vampyroteuthis infernalis's picture

Just like any conmen they are selling to their intended audience, those greedy bankers and politicians who want to own it all. Speak the truth and they would get fired on the spot.

Clint Liquor's picture

The big lesson they fail to learn: There is no such thing as a perpetual motion machine.

Son of Loki's picture

Stocks may fall but "house prices never drop," ... my realtor told me.

El Vaquero's picture

The easiest way to predict the weather is often to look up in the sky and figure that tomorrow will be much like today.  Afterall, it will still be winter tomorrow.  This line of thinking is pervasive in financial/RE markets.  The problem is when it was sunny and nice yesterday and that damned tornado comes through today. 

DOT's picture

Conformation bias is a bitch.

Boris Alatovkrap's picture

First principle is safeguard against Confirmation Bias. Always remember first principle in investing, saving, preserving wealth, any venture... are you create or preserve value? Investment strategy that is rely on bigger fool is base on luck, not value.

(Prior performance is not guarantee future value.)

kralizec's picture

Past and current destruction of value however is a guarantee of future destruction of value.

Boris Alatovkrap's picture

You are invoke ghost of Satayana.

Hobbleknee's picture

There's only one lesson; Hazlitt's lesson:



Mister Kitty's picture

Maybe the Princeton and Harvard boys aren't as smart as they think they are.  Bastards.

Herd Redirection Committee's picture

I'm not convinced even they still buy their own BS.  Their key is and has been: "act as if (you are the smartest man on the planet)"

Landotfree's picture


7 billions + all the economist have failed to realized the gravy train runs out.   Eventually you can't expand exponentially, then comes collapse then comes liquidation of the unfunded walking liabilities.

"Money for nothing and your chicks for free"

The Architect - The matrix is older than you know. I prefer counting from the emergence of one integral anomaly to the emergence of the next, in which case this is the sixth version. 

*Again, the responses of the other Ones appear on the monitors: "Five versions? Three? I've been lied too. This is bull****."* 

Neo: There are only two possible explanations: either no one told me, or no one knows. 

LawsofPhysics's picture

Precisely, fuck'em, the paper-pushers are of no real value anyway.

Roll the fucking guillotines...

Landotfree's picture

All credit is created out thin air.   Once exponential growth can't be maintain, the equation will feed on the unfunded walking liabilities.   The outcome will always be the same, just matter of how many are going to be liquidated....

Once many systems ago... virtually all of Rome was liquidated.   Last time, most of Europe and Asia and Africa were liquidated... 100+ million.   This time.... well like they say... the bigger they are are... .the harder they fall.  

LawsofPhysics's picture

Bring it.  I have been long sharecropping and a dependable tribe for quite some time.

Landotfree's picture

Very few of the 7 billion will go uneffected this time... I would not be surprised by 1-2 billion Asian going very fast.   There are going to be very few uneffected on this floating rock this time.   

El Vaquero's picture

I suspect that you can look at the non-industrialized carrying capacity of the planet and figure that we might just shoot below that.  Energy shortage -> financial crisis -> further energy shortage -> OH SHIT!  And in this case, an energy shortage doesn't mean that the amount that we are getting has declined.  It means that it quit growing and the ponzi comes apart as a result.  A big enough financial crisis and it will grind industry, including agriculture, to a halt.  Halted long enough, and it will not be restarted, at least not in its former glory.  That doesn't mean that there won't be a few pockets here and there that can kind of live on a phantom industrial economy for a time, as there are still a few places where some of the vital resources are easy to extract and the populations are small enough to not burn through them immediately, but world wide if it stops for a couple or a few weeks, I doubt will it will be restarting. 


The reason why I think we may shoot below the non-industrialized carrying capacity of the planet is simple.  We have depended on the tools and bounties of industrial civilization for long enough to have forgotten vital skills for living in a non-industrial or even a quasi-industrial society.  People will be like deer in an 18 wheeler's headlights. 

Raging Debate's picture

Landotree -

I know the debt overhang in the US in 2008 was 40%. The debt really started to climb with US bailouts of LTCM in 1998 and never looked back. What is happening is reversion to the mean. The world used debt the same as the US. It doesnt mean billions die but your right, near all people on earth are reverting to the mean. Certainly, there have been deaths by being unable to afford food or heat (energy). But how each nation fares in death toll really has more to do with the social safety nets of each country.

It means a reduced quality of life for awhile, several more years is my best estimate here in the US. We added debt to delay the day of reckoning so instead of a tough, deep recession around 2000 we now are having and will have a decade plus of depression. And the banking system and politicos saved and enriched themselves through the bailout process meanjng they
spent little or no time in reorganization of labor, pro revenue policies, trade imbalances etc.

Your just beginning to see policy being formulated for save and invest economy instead of Liassez Faire but its going to hurt for awhile. On top of it both the US and China have demographic imbalances, Boomers are retiring and old people downsize consumption.

El Vaquero's picture

You are fully missing half of the equation:  Physical resources.  We are using them or destroying them faster than they are being replenished.  Oil is the big one.  From $12/bbl in 1998 to ~$100 today.  From drilling wells where it comes gushing out of the ground to pumping to horizontal drilling and fracking and giant floating oil rigs today.  Oil is also a necessity for our current industrialized society.  Not coal, not nuclear, not natural gas, but oil.  Not all sources of energy are fungible.  Oil provides mobility to a degree that the other sources do not, and it is that mobility that is important.  Knock out the USD and you are going to see the US's ability to import oil decline, which is a big deal, not only to the US, but to the entire world.  We import roughly half of the oil we use, and a significant portion of the oil that we use goes towards growing crops, raising livestock, harvesting crops, shipping food, processing and packaging food.  Take away imported oil and we're going to have a choice:  Don't drive anywhere, or don't eat.  That is not a choice, as it collapses the ability for many to go to work to earn a living to purchase the food they eat.  Infrastructure will start decaying at an alarming rate as well. 


The effect does not end with the US either.  We export corn and wheat.  Now, you're going to start seeing famine and countries breaking down because a portion of their food just disappeared.  China won't be able to sell us it's cheap crap, which will become a drag on its economy.  The interconnectedness of the financial system means that Europe will be in the same boat we are.  With collapsing economies, the infrastructure to take advantage of new sources of oil will not be made because they will be too expensive, both in nominal and in real (resource) terms, and oil fields do not produce forever.  Without oil, the carrying capacity of this planet is nowhere near 7 billion people.  The logical conclusion is that people WILL die, and in very, very large numbers. 

Raging Debate's picture

El Vaquero - I like your commentary in general but disagree on this one.

There is a difference between want and need. I want a Hummer but since I need to get to work and can't afford a Hummer, I go with a used motorcycle. I want Chinese food for supper but I can only afford a bag of brown rice. Reduced consumption does not equel death because of $100 oil.

And by the way, I did a study on the percent of speculation for President Bush in 2008 per barrel oil. It was 17%. I advised Bernanke dry up the discount window for the big IB's (Goldman etc) for a month. We got a week so the research was not as extensive as I wanted. But my point was spook speculators by advising this record, oil dropped $9 in two week from $102. Your welcome :)

I brought this up to demonstrate I do have a knowledge of peak oil and i can assure you "we aint all gonna die!!! " Isnt 30% economic contraction painful enough for you?!? I have loose "club" associations. I had to work through channels but is shows we are not helpless and there are a ton of bright people here that can offer something at times too.

El Vaquero's picture

Look, the food that people eat is produced globally.  The midwest supplies grain.  China supplies garlic, and various other things.  The food that you eat probably traveled, on average, 1600 miles from its origins.  This requires oil, and that's just the shipping that I'm talking about.  That doesn't get into the petrochemicals used for pesticides and herbicides, the diesel to run the tractors, the diesel to run the generators to pump water, the oil based plactics for packaging and various other uses of oil.  If you eliminate half of the US's oil supply, after you put oil towards food production, mining and the other necessary items for maintaining the energy infrastructure and agricultural infrastructure, there will be very little left over for anything else.  You are not going to grow enough locally around NYC to feed NYC, and thanks to globalization and insustrial agriculture's regulatory capture of congress, there is not much of an alternative in place for the event where the dollar stops us from importing oil.  What are you going to do then?  It would only take 2-4 WEEKS for society to start breaking down if you shut oil off, and in some places faster than that.  This is not a pure economics issue.  This is a finance meets physics issue, and physics will win every single time. 


To reiterate, we use ~18.5mbpd in the US, and we produce ~7.5mbpd.  Think that having half of our oil supplies go away in the event of a dollar collapse is unrealistic?  You have to know how the petrodollar system works, and you have to know what that system breaking down means for the US importation of oil. 

NidStyles's picture

Oh the last gasps of Empire.

NidStyles's picture

Ask someone that says he can explain the exact situation and attribute causes to effect and I will show you someone that has a narrow dogmatic view of what is going on and is part of the problem.


Oil prices are controlled by Wall Street so they are not indicative of anything more than Wall Street taking it's cut, and the oil corporations having to bribe public officials to make a dime.

 Sometimes I wish some of you would actually think out what you are saying here....


Cost is not a good indicator of supply and demand when the value of the currency itself is highely manipulated and distorted beyond all rational thought.

El Vaquero's picture

Are you actually implying that floating a giant drilling rig in the ocean is on par with the costs of drilling a well and having oil come gushing out?  Are you actually implying that even running a pump jack is on par with the way oil extraction occured in the early days?  The real, material costs of extracting oil are going up, which requires that more and more of the economic input of the US and of the world go towards energy production.  This eventually becomes a strain on the economy. 

Raging Debate's picture

El Vaquero -

The more the dollar devalues the more it costs for import. Nothing more need be said. $8 gallon gas means I drive a scooter to work, share heat between homes (like when the ruble collapsed but didnt go to zero nor will we) and food choices dont exist. You eat basic staples. I hedge in luxuries too not just gold and real estate. I think that will happen to the dollar, but probably not until we lose reserve currency status and China is not ready, they have their own depression to face first.

NidStyles's picture

You are making gross assumptions without fully understanding my comment.


Off shore oil drilling is primary due to the regulations restricting on shore or close shore oil drilling.


Inflation is the boogeyman that you are chasing especially in the most regulated and controlled industry on the planet. There are no sectors that are under the thumb of government as the oil companies and energy in general.

Landotfree's picture


The system is debt/credit.   Currently the U.S. system is $58T of about $200T global system.   Unfortunately or fortunately humans have no ability to supply or demand exponentially long-term... usually 60-80 years.   System expanded from 1945 till 2007 at about 7% clip... no so much since then.... the system was generating about $4.7T annuallized by 2007, and actually went negative in Q2 2009, and again in Q1 2012.   

Even with the federal government turning on debt creation and the Fed increasing it's balance sheet the system is dangerously close to non-expansion.... and eventually the death spiral i.e. collapse.   The amount of power needed to hold off the collapse is unlimited power... humans do not have unlimited power.

It's going to hurt a good portion of the unfunded walking liabilities until they are gone and their body is returned to the Earth.   I am sorry but humans have no ability to destroy the Truth, sure they can ignore the Truth for 60-80 years but unless they have unlimited power... eventually unable to expand at the rate needed, collapse and liquidation.  


Raging Debate's picture

Landotree -

Unfunded liability argument: That which cannot be paid back wont. I do not mean to sound obtuse about the suffering. I have had my own share. Unless your really a hermit in a cave, you point all are affected is correct. Well, maybe not the top .001% which also explains why they are so slow in policy adjustment.

HyBrasilian's picture

I will gladly pay the pope [on Wednesday], for a piece of cheese [today]


"I am the Architect. I created the Matrix. I've been waiting for you. You have many questions, and although the process has altered your consciousness, you remain irrevocably human. Ergo, some of my answers you will understand, and some of them you will not. Concordantly, while your first question may be the most pertinent, you may or may not realize it is also the most irrelevant."

~The Architect

kridkrid's picture

Help me to understand... why must the unfunded liabilities be liquidated? The process of liquidation doesn't remove the debt. Is it simply that only something as big as world war and act as a catalyst for a reset? Or is it the other way... the reset is merely used as cover to cull the herd? Or something else?

Landotfree's picture

Once the system starts to collapse... a portion of the people walking around are liabilites as the amount of new credit goes negative.   The only way to get the system going again is to liquidate i.e. burn a portion of the forest so that it may grow again.   Last time, the world got frustrated by the slowness of the liquidation phase... world hired Hilter to speed the thing up... instead taking 40-70 years, Hilter basically cut it down to 2 decades.   Once the global credit system collapse.... well, lots of so called assets go over to the liability side of the balance sheet.   You can't support it all.

No way you fed 7 billion without a functioning credit system (money for nothing and your chicks for free), a good portion is going to have to go... those are are unfunded walking liabilities.   Usually large scale war is used to clear the forest for new growth and start the process back over.  Of course, small scale warfare, disease and sarvation is the slower version.... either way the system will have to be liquidated.



Landotfree's picture

More or less same thing really, the machines built into their system a cycle which they could monitor and assist.  Humans have created system which has it's own cycle and it to can be monitored and taken advantage of.

The following comes to mind because once you tell Humans the truth... the tend to reject it.  I have nothing but bad news for most people, but I didn't invent Math.   

"Oracle: Seems like everytime we meet, I ain't got nothing but bad news. I'm sorry about that I surely am, but for what it's worth...you've made a believer out of me. Good luck, Kiddo."  - The Oracle 

Raging Debate's picture

Landotree - Debt can be extinguished through bankruptcy. Countries did a bunch of it by currency devaluation, individuals are self-explainatory. MAD doctrine makes it far more pain to attempt to conquer nations to fill in big holes. Even after WWII I remember a year, think it was 1954 but aomeone correct me if I am wrong, debt got a huge haircut by US government and that year was a mini depression. World war is a possibility but I doubt it. Even so, I have my own hedging but it doesnt include building a bunker or moving to a remote island.

LawsofPhysics's picture

Please, eCONomics is not a hard (physical) science as none of the currencies on earth are tied to anything real.  It's con-game, a social science of maintaining power and control over resources (including the human kind).

hedge accordingly.

BandGap's picture

Oh, now I get it.

There's no such thing as a free lunch?

SAT 800's picture

An important step along the way Chipmunk. More will be revealed.

ziggy59's picture

The eCONomists, banksters, politicians are liars...
For them to speak the truth, they would be not employed or even something better planned for them...

max2205's picture

Mouthpieces   correct

HyBrasilian's picture


Judge Crater's picture

The economic model for most world economies can be described as a "bust out" operation, the Mafia method to load a business with debt you never pay off and then to take the profits with you, leaving the economic wreckage behind.  This Tony Soprano method is the modus operandi of most hedge funds.  When it comes time to pay the piper, the looters are long gone, using their ill gotten gains to buy mega yachts and Manhattan apartments.

Atomizer's picture

The Silk Road - The story of one of the world's oldest and most historically important trade routes and its influences on the culture of China, Central Asia and the West.


Color me shocked../Sarc

yogibear's picture

There is a finite number of ghost cities that can be built. Maybe the plan is to let them deteriorate, knock them down and rebuild.

Cornholiovanderbilt's picture

Order out of chaos is there goal.  They will fail.  They are desperate.  Just look at Kissinger.  He's about to die of old age without seeing the fruits of his labor come to fruition.

besnook's picture

the one thing everyone is missing, including the economists, is the size of the trade in yuan. the current measurement metrics are inadequate. is the "slow down" in emerging markets partially due to the slowdown in dollar trade?

moneybots's picture

"The Fed’s huge monthly purchases of long-term assets – so-called quantitative easing – have benefited the world as a whole by propping up demand and economic activity in the US. Without QE, which the Fed is now gradually tapering, world trade would have taken a much bigger hit."


Prop up.  Artificial.  Is world trade going to take a delayed bigger hit?

williambanzai7's picture

F- to the author. The flawed solution is the problem. That quote deserves a big red X.