

The Rich Country Trap - balsam
http://economix.blogs.nytimes.com/2014/01/02/the-rich-country-trap/?_r=0

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einhverfr
Being an American currently living in Indonesia I think there are some
structural things missing in the analysis here.

The big one is why banks in rich countries are too big to fail. In Indonesia
if there was a banking crisis, there is no way that a bank like BCA could be
bailed out. There would be no alternative to failure and while there are
concerns about overly predatory practices regarding consumer debt, it is
different than it is in the US.

Instead the economy is built on a very different basis. 60-70% of Indonesians
are self-employed. There are a number of corporations which have institutional
investment (including some very large companies) but on the whole the vast
majority of the actual economy runs on the basis of small business and the
self-employed without investment capital beyond friends and family.

What this means is that the amount of control that banks have over the economy
is lower. In the event of a banking crisis, people would find ways of
continuing to trade and work, and you can't have the massive and debilitating
layoffs that occur in the rich countries. In essence the banking system may be
less protected, but at the same time, it is less influential and so while the
effects of a collapse can be temporarily severe, it doesn't have the same
reach that it does in the US.

A big part of the rich country trap is a economy that runs on investment
capital, where the banks are a major source of that capital. A small-business-
centric economy is far more robust against this sort of crisis.

~~~
ashray
Well, I live in India and it's quite similar to Indonesia (have traveled to
Indonesia before..) in the ways that you mention.

Many people in India operate under the same principles, small privately owned
and financed businesses. However, the big banks do indeed deal with the major
corporations. At this point of time, the reserve bank of India has published a
report stating that the failure of ONE major corporation will prove
catastrophic for our economy. [1] Sounds absolutely crazy but it seems to be
true.

This is because banks have over extended credit (once more ?) and maintain
very low liquidity. If one of their debtors defaults, the bank will be
finished, thereby unleashing a domino effect on their creditors and debtors..
crash and burn. Add to this, the fact that the country runs on a major current
account deficit (export/import imbalance) means that the government will not
be able to do any massive bailouts. The foreign exchange reserves in the
country are still small. Which means, we can't print more currency to hack our
way out of the problem either because we'll see hyperinflation in a very bad
way.

Of course, the regular joe here will be able to find a way to continue running
his business because he may not have a big relationship with a big bank. But
macroscopic factors like big banks failing and the economy collapsing will hit
him and everyone else hard as well. There will be massive layoffs for folks
who work in big corporations and while in absolute percentages of population
this may not look like much, it'll still impact a few hundred million people
easily in a country like India.

TLDR; Banks in India need to be reigned in, otherwise things are going to get
very ugly sometime soon.

[1] - [http://www.moneycontrol.com/news/economy/rbis-financial-
stab...](http://www.moneycontrol.com/news/economy/rbis-financial-stability-
report-is-devilthe-details_1016722.html)

~~~
einhverfr
Keeping it in perspective though, the 2006-2008 crisis had our banks eating
up, over three years, an entire year's worth of GDP in government bailouts
(including secret federal reserve bailouts). And that was damage reduction.

I am not saying things would not be bad if, say, BCA and similar banks were to
collapse here in Indonesia. If they did, the corporate world here (including
the toll roads) would be sorely hurt. And people would lose savings. And much
more. However, there are catastrophes and there are catastrophes. I am hard
pressed to imagine a case where the results would be worse than the 2006
crisis in the US.

------
thrush
"There is no sector in the modern United States or Britain that is willing to
stand up to big banks in the political arena. And top financial-sector
executives continue to enjoy such high prestige that they are still called
upon to run public finances. Politicians continue to defer to the supposed
wisdom of these individuals."

... looking at you, kid (tech sector)

~~~
jrkelly
Churches are the first thing that leapt to my mind. The new pope seems to be
headed this way: [http://www.businessinsider.com/the-pope-on-the-financial-
sys...](http://www.businessinsider.com/the-pope-on-the-financial-system-
inequality-money-2013-11) And religions have done this historically:
[http://en.wikipedia.org/wiki/Jubilee_(biblical)](http://en.wikipedia.org/wiki/Jubilee_\(biblical\))

~~~
saraid216
It's worth noting that "churches" isn't the monolithic system that they sound
like. There are a significant number of clergy and churches who are in it for
the money and may as well count as part of the financial sector for the
intents and purposes of this discussion.

Pope Francis is making statements, but I don't know what he can do beyond
talking, and assuming he has useful actions to take, if he will take them.

~~~
einhverfr
While not a Catholic, I think Francis's accomplishments in this area are both
overrated and underrated. They are overrated because he isn't saying anything
that the last four popes did not say in terms of the actual issues.

But they are also underrated because what Francis has done is to put the
pieces together differently. He's essentially pointed out that the Church's
teachings on economics (again going back more than a century) are central
because the modern capitalist structure leads to everything the Church
deplores in the modern world. It leads to independent retirement (throwing old
people away, in Francis's words), and that to abortion. In essence, what he's
done is to step back from the fights of the 1960's and return to the fights of
the 1930's, and for this the Progressives seem to love him.....

What the Catholic Church can accomplish is the further development of
Distributist thought, as an alternative to Capitalism. But Distributism is no
longer just a Catholic thing. I was introduced to the concept by a Russian
Orthodox priest, and I find many of the most Distributist folks I know are
Neopagans (particularly Asatru).

~~~
toyg
The difference between Francis and his predecessors is that he actually
started a shakeup of internal structures, rather than keeping the debate on a
purely theological level. This is what "progressives" like. His two
predecessors could talk a good game, but when chips were down they would
invariably nominate dodgy ultra-conservatives to take care of finances and
would use Vatican Council II as a fig leaf over a de-facto structural alliance
with US-sponsored capitalism, _because Cold War_.

This Argentinian fellow has made some remarkable statements (on priest
weddings, among other things), and if he follows through on them, the Church
could change radically. He's also dismissed part of the old guard, promoting
more "liberal" figures; among other things, he's finally admitted that the
shady IOR (the Vatican bank) will have to clean up its act, and nominated new
managers to do just that.

In terms of economic doctrine, I personally don't see much of a difference in
what he's saying, compared to his European predecessors, but I admit I haven't
studied this closely. What is clearly changed is the willingness to harshly
criticise the North-American model. In a way, this guy is the first post-Cold-
War pope; US donations are faltering (because of pedo scandals) so their
political weight is diminishing inside the Church, and Bergoglio himself
represents a South-American view of the world which is much more critical of
traditional US policy in all sectors, including economic ones.

~~~
einhverfr
I don't know about shaking up internal structures. Certainly in terms of who
has been excommunicated, there has been no change.

What he has done is moved the economic teachings from a branch of Catholic
social teaching into a more central role. I think that's easy to understate.
But that's not the same as taking a new position on the issues. And I think
the liberals have vastly overstated the way in which Francis seems to be one
of them (he has excommunicated a bishop for calling for the ordination of
women for example).

> "What is clearly changed is the willingness to harshly criticise the North-
> American model."

I don't know. Rerum Novarium, Centicimus Annus, etc. all included similarly
harsh language. That's not something I see as different. It's just that Popes
were ignored when they said this. In fact John Paul II complained heavily that
such criticism of Capitalism were ignored by so many Catholics....

> "Bergoglio himself represents a South-American view of the world which is
> much more critical of traditional US policy in all sectors, including
> economic ones."

I think that's an important point actually, and I think it puts his attacks on
independent retirement as poisonous fruits of capitalism (i.e. a society that
"throws away old people") in a certain context. But the corrolary here is that
he has legitimated Dorothy Day's withering attack on Social Security and thus
attacking causes even more dear to the American left than abortion.

------
toyg
"Somebody" observed a long time ago that mature capitalism would produce an
unmanageable financial sector whose interests are completely misaligned with
the general one. He might have been wrong on a few other issues, but on this
one he was absolutely right: the problem is structural and should be
considered as such. If we let financial markets grow more and more, crashes
will get worse.

~~~
einhverfr
Actually lots of people observed this. I am not sure who you are referring to.
Keynes? Marx? Minsky?

Of these, I think the most damning condemnation actually came from Minsky (who
was an American economist).

------
gaius
You could have written this about car manufacturers in the 70s or miners in
the 80s or dotcoms in the 90s or property in the 00s.

