Waylaid Dialectic

July 1, 2015

Greek crunch tweet

Filed under: Random Musings — terence @ 12:45 pm

The Dimpost has a handy summary of the insanity of it all here.

I think there’s a broader lesson for development economics too, along the lines of:

Either sheer fecklessness or (more often) underlying problems of political economy sometimes lead countries to acquire unsustainable levels of debt.

As a donor/multi-lateral you have surprisingly little ability to prevent this. Except during crisis points. Then it becomes very, very tempting to impose austerity.

However, this is, almost always a bad idea.

Bad because:

(a) it’s pro-cyclical and often makes deficit problems worse than they were.

(b) matters of domestic political economy usually mean austerity hits the least well off hardest.

(c) dropping the a bomb can have very counter-productive political consequences. (handy rule of thumb: if your policy prescription promotes riots something has gone wrong).

This doesn’t mean that the debtor country should be given a free pass. Or that there’s no need for reform. But it does mean its a mistake to think (as I once heard an aid agency staffer remark) that “this crisis will be too good to waste”.

Reform is a long run thing — and not often helped by short term detonations.

[update: Henry Farrell has some sensible comments too; and some sensible comments from ODI.]

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