An Economist in Ecuador Gives “William Blake” (sic) a Quiz

By William K. Black

Dr. Pablo Lucio Paredes, an economist from Ecuador who served as Planning Minister implementing the Washington Consensus in the disastrous run-up to Ecuador’s 1999 financial crisis has responded to a presentation I made at FLACSO in Quito, Ecuador by publicly announcing a quiz about economics he would like to administer to “William Blake.”  It is easy to spell foreign names incorrectly.  I am happy that the quality of my presentation reminded Paredes of William Blake.  Here is the link to my talk.

Paredes plans to be the grader of his quiz.  The tone of his “letter” to “Blake” makes it clear that he will declare I have failed his test.  He has already provided his conclusion: that I only presented because of my desire to issue “propaganda.”

His letter starts out with a motif that is famous in America – the economist’s equivalent of “I’m just a poor country lawyer, but….”  This, of course, is a signal to hold your wallet tight whether one is speaking to a lawyer or an economist.  Paredes was a senior government official and devout acolyte of school of economics that worshipped and implemented the Washington Consensus.  He knows very well the disaster those policies brought to Ecuador.  Even Hoy, a paper in Ecuador that championed Paredes’ economic dogmas, and seethes with hostility towards my views described my presentation of the background of Ecuador’s miracles as “irrefutable.”  I am hopeful that Paredes is part of the modern consensus that realizes that key aspects of the Washington Consensus were disastrous.

I started my substantive presentation at FLACSO (slides 2-6) by quoting extensively from what a representative conservative U.S. scholar, Thomas C. Bruneau, was writing in 2006 before the presidential elections in Ecuador.

I chose Bruneau because his article related that he visited FLACSO to consult with its faculty in the preparation of his article.

Bruneau’s conclusion can be summarized briefly: Ecuador is hopelessly screwed up and likely to remain so.  His rationale is more detailed.  The core of my presentation was explaining at length to the FLACSO audience the twelve principal reasons for his conclusion.  Given Aguilar’s critique it is worth emphasizing that the third reason that Bruneau cited in support for his thesis was that Ecuador was a classic victim of the “curse of oil” rather than a beneficiary (slide 2).  Private oil company investment, rather than helping Ecuador, “weakened” Ecuador.  But the heart of Bruneau’s dozen reasons (numbers 7, 10, 11, and 12) was his conclusion that Ecuador’s financial, political, and military elites were the central problem.  “By observing the behavior of the elite and talking with them, it is clear to me that they have not embraced democracy….”  They did not embrace democracy because they did not embrace their fellow citizens.  Instead, they looked at them as inferiors unfit for democratic rule.  Private investments were discouraged by Ecuador’s terrible political and social instability.   

Bruneau describes Ecuador in classic crony capitalism terms in which the business and military elites create political, social, and economic chaos because they’re energies are devoted to competing with rival elites to see who can best use the government to siphon the limited wealth of a poor nation into their troughs.  (In neo-classical economic jargon this is referred to as “rent-seeking behavior.”  I avoid that jargon because it makes nothing clear and is a misleading euphemism for fraud, corruption, and what Frederic Bastiat aptly described as “plunder.”)  Bastiat’s warning rings true to anyone familiar with crony capitalism.

“When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it.”

Theoclassical economists promote the criminogenic policies that create crony capitalism and then serve as the great apologists for crony capitalists and their plunder.  Of course, they purport to condemn such behavior, but in economics it is “revealed preferences” that count.  Their policies create crony capitalism so I focus on their policies rather than their odes to faux “free markets.”

Paredes’ wonders why I have the chutzpah to present a lecture on Ecuador’s economic development given that my primary areas of expertise are in fraud (including cartels and market power abuses), corruption, financial regulation, public finance, and Latin American development.  The short answer is all of these areas that I teach and research (and implemented for a decade in the heart of our savings and loan debacle) are essential aspects of economic development.  Indeed, explaining why this was true was a substantial part of my FLACSO presentation.  The Washington Consensus had two disastrous components.  One was its abject failure to understand sovereign currencies and the terrible damage that austerity would cause.  I discussed this failure (which falls within my colleague’s macroeconomic expertise) in my talk, but I made a far more extensive presentation about the second great failing of the Washington Consensus (which falls within the core of my expertise).

The second great failing of the Washington Consensus was its failure to understand white-collar criminology and the essential role of “regulatory cops on the beat.”  The result of radical privatization and deregulation was the creation of massively criminogenic environments.  These environments often lead to financial crises, cartels, monopolies, and corruption.  Each of these factors is associated with sharply negative economic, political, and social problems.  Neoclassical economic dogma, without any factual basis and contrary to human history, “assumed a can opener” by assuming that private ownership of formerly public assets would create “private market discipline” that would prevent abuses.  Accounting fraud, however, creates record amounts of fictional reported income and creditors eagerly fund, not discipline, such frauds.  The continuing failure of neoclassical economists to understand “accounting control fraud” led me to explain these points in detail in my FLACSO presentation.  John Williamson, the economist who created the phrase and the ten tenets of “the Washington Consensus,” admitted that the central flaw of those tenets was ignoring the need to create an effective rule of law through regulation and criminal justice.  My FLACSO presentation quoted Williamson’s original paper and his later dishonest effort to reinvent those tenets to cover up his failures.  It turns out that my areas of expertise and my macroeconomic colleagues’ areas of expertise proved to be the keys to understanding the grave deficiencies of the Washington Consensus and to building a far superior development model.  Indeed, I am sure that Paredes knows that effective financial regulation and effective efforts against elite fraud (including cartels and other forms of market abuse) and corruption are essential elements of the modern development literature.  Paredes is kind enough to say very nice things about my expertise in these fields that lie at the core, not the periphery, of modern development theory.  It turns out that all my work deals with vital concepts for understanding development.

My FLACSO presentation (slides 22, 23, and 38) emphasized how John Williamson, the author of the Washington Consensus (and the man who gave it that label) had sought to reinvent history by claiming that his original document had warned about the vital need for effective financial regulation.  It did the opposite – promoting financial deregulation without any expressed concerns about the need to create an effective financial regulatory system.  Indeed, Williamson was so dishonest that he claimed that the savings and loan deregulation that created the criminogenic environment that produced the S&L fraud epidemic that drove the S&L debacle was so successful that it should be the model for Latin America.

“It is generally judged to have been successful within the US, and it is generally assumed that it could bring similar benefits to other countries (slide 22).”

The actual, catastrophic results of S&L deregulation were the subject of slide 23.

Had Paredes read my work, which we place on UMKC economics’ blog (New Economic Perspectives), he would see that I have written a great deal about Ecuador and the nature and results of its economic development policies.  I also draw heavily on the expertise of my UMKC colleagues, three of whom are among the global experts on Modern Monetary Theory (MMT) in warning about the risks of a dollarized economy.  This was my fifth trip to Ecuador.  On each of the trips I have conducted training sessions for regulators and other government officials (for zero or minimal compensation).  I have also lectured on development topics at universities in Ecuador on several of my prior visits.

Paredes is less likely to know that the “law and economics” course I have taught for many years at UMKC covers several key development topics including, but not limited to, Hernando de Soto’s work on encouraging legitimate business formation and strong recording systems.  This should not be surprising given the emphasis of classical economic scholars on the importance of the “rule of law” for effective political, social, ethical, and economic development.

As to Paredes quiz:

I talked expressly about the concept of the oil curse.  Indeed, it was the third substantive point I made (slide 2).  I talked expressly about private investment.  I talked about how private investment in oil had, in Bruneau’s view “weakened” Ecuador’s economy (slide 2) and how Correa, the pragmatist, had taken a page from de Soto’s playbook and sponsored a law (and the application of technology) designed to make it possible for entrepreneurs to open a legitimate business in vastly reduced time (slide 37) and created a new competition agency to improve the chances for competitive private enterprises rather than the immense market power often created by privatization under the Washington Consensus (slide 38).

I discussed, repeatedly, but without the misleading and confusing jargon, examples of “rent seeking behavior.”  Indeed, I called in “economic treason” on the part of the (ir)responsible government officials who signed the outrageous “contracts of adhesion” with the oil industry that caused such harm to Ecuador.

Did the renegotiation of Ecuador’s share of oil revenues produce a net increase in oil revenues?  Yes, and Paredes makes no claim to the contrary.  It produced a very large increase in net oil revenues and it created a far bigger “upside” should oil prices rise.

But reading Paredes’ quiz brings to mind a more important question.  He does not deny the facts of Ecuador’s miracle.  Indeed, he does not deny that Ecuador’s achievements, relative to what conservative U.S. scholars were predicting for Ecuador when they wrote in 2006, were miraculous.

What Paredes is really arguing is that the current miracle is not the first miracle in Ecuador.  He wants to be praised for his part in achieving a prior miracle.  Great.  He is free to make that case for his place in history.  But be careful in picking your time period.  Financial deregulation typically produces a period of high reported (fictional) profits produced by accounting fraud that lead to high reported growth rates.  This frequently leads to a financial crisis and very severe financial crises lead to severe economic crises.  Such crises always increase unemployment and poverty and often increase inequality.  One of the extraordinary achievements during Ecuador’s miracle is that it occurred despite the Great Recession.  Any study of this nature is highly sensitive to the years chosen.  If Paredes wishes to present his case for his (or others’) miracle(s) I encourage him to do so.

As I read Paredes, he agrees with Ecuador’s key policies.  He does not dispute the dramatic increase in spending on education, health, and infrastructure.  Paredes does not dispute the desirability of this dramatic increase in spending targeted exactly where even Williamson said was the “quintessential” correct priorities.  Paredes does not dispute that the increased expenditures produce large gains in the quality of life of the citizens of Ecuador and under neo-liberal development theory serve as essential “investments” likely to produce future growth.  Paredes knows how few nations during the Great Recession have been able to achieve Ecuador’s “trifecta” – substantially decreased unemployment, poverty, and inequality.

I think our only obvious area of disagreement is about whether Ecuador has an “effective democracy.”  Paredes claims that “all powers are held by the government.”  (“[T]odos los poderes están en manos del Gobierno.”)  But Paredes knows that his hypothesis has been falsified.  Indeed, that was exactly the point I made in my FLACSO presentation.  I said that the “proof is in the pudding.”  In an effective democracy (1) it is perfectly possible for the non-ruling parties to win an election and (2) when the ruling party loses an election it peacefully leaves office and tries to figure out how to win the next election.  Ecuador has run this “natural experiment” recently and the ruling party has lost a series of municipal elections in Ecuador’s largest cities.  Either “the government” does not in fact hold “all power” or “the government” is committed to a pro-democratic policy of not using that purported total power to block democratic elections even after it loses such elections.  Ecuador has an effective democracy.

Here are my questions for Paredes.  They are not a “gotcha” quiz.  I actually want to know his views because I believe that our areas of actual disagreement are likely to be small.

1. One of the things I have written about in the context of several countries, including Ecuador, is the critical role of migration.  Paredes is correct that unemployment, poverty, and inequality have fallen in other recent years in Ecuador.  One of the most important drivers of these results in the past, however, was that the poor and unemployed people of Ecuador felt such despair that they emigrated in massive numbers relative to Ecuador’s relatively small total population.  Recently, Ecuador has reduced unemployment, poverty, and inequality – and produced net in-migration.  The two results are not even remotely equivalent.  Does Paredes agree that the first result represents a catastrophic failure of Ecuador’s economy while the second represents a triumph?
2. Paredes states that oil production in Ecuador has fallen.  I believe it is currently at a record level.  What time period is he referring to when he argues that production declined?
3. Did he support the renegotiation of Ecuador’s share of oil revenues at the time it occurred?   Does he support it now, in retrospect?
4. The key need was to increase Ecuador’s net revenues, as I emphasized in my FLACSO talk.  Absent Correa’s renegotiation of Ecuador’s debt Ecuador would have had far fewer net revenues available to dramatically increase the spending on education, health, and infrastructure.  Did Paredes support Ecuador’s repudiation of odious debt and its debt buy backs when they occurred?  Does he support them now, in retrospect?  Did Paredes support Ecuador’s successful efforts to reduce corporate tax evasion at the time they occurred?  Does he support them now, in retrospect?
5. Paredes appears to be arguing that Ecuador cannot be an effective democracy because the same party controls the executive and legislative branches.  That is a common characteristic in democracies.  I ask Paredes, upon calm reflection, whether he wishes to maintain the position he stated.

I try to minimize areas of disagreement and debate only the areas where there are important differences of opinion.  I believe that Paredes and I may be able to agree about a broad range of topics.