1) You served as a member of the Bank of England Monetary Policy Committee during the onset of the sub-prime crisis and the consequent financial crisis that is known as “the great recession”. Could you describe us your feelings from that, we suppose, intense experience? Would you like to share with us an incident that describes how crucial that period was and how important the decisions were that you had to make under such time pressure?
It was a learning experience. Academics are rewarded for having something important or original to say. Policy-makers are rewarded for getting it right, or at least, appearing to get it right. And academics can take their time. The immediacy of the crisis gave no time to learn, no time to properly understand what was going on. It was necessary to act at all costs using first principles. As far as monetary policy went, things were relatively straightforward once the crisis was in full flow. At least, the direction of policy and the need to anticipate what would happen at the lower-bound for interest rates became the focus of concern. But both sides of the crisis showed the limitations of monetary policy. Tightening policy prior to the crisis would likely have had little impact on what happened subsequently. The build-up of debt and the risks taken on by banks had much stronger driving forces than low interest rates. Equally, although it made sense to cut interest rates rapidly and to start the program now known as “quantitative easing”, this was never going to be a magic bullet. I will never forget participating in the coordinated rate cut in October 2008. The logistics were fascinating from the inside but also to see how events galvanized coordinated policy action was a real measure of the determined nature of the policy response.
2) Having experienced both sides of the life of a distinguished economist, the life in academia and the life in policy making in prestigious institutions, could you tell us which of the two you prefer? What are the advantages and disadvantages of each position?
The easiest question you will ask. I am delighted to be back fulltime as an academic. And being away only reinforced the benefits of academic life. Best of all is having the time to think and write. And getting the constructive and collegial feedback on what you are doing from a range of interesting and intelligent people is a joy. But, of course, your sphere of influence is limited. I do like to have people read and even criticize my work. But the immediate impact is less clear. The role I played was as a policy maker, not a policy advisor, and that gave me a chance to have a direct impact on policy. Being in a position like that that can be seductive. But it is humbling too. Academia allows you to try to plough a deep furrow and to focus on creating a long-term understanding of issues.
3) What do you think about the policies that have so far been applied for the recovery of European countries from the debt crisis? Could you comment on the austerity-growth debate?
I have throughout taken the view that we need to worry about getting the public finances back on track while pursuing growth. There are so many things that would make a difference to growth which can be pursued and would make a long-term difference. That is why I established the the LSE growth commission (with my colleague John VanReenen) and we have had some traction with some of the policy prescriptions that we put forward. I was not (and am not) in favor of saying that austerity should be postponed to some ill-defined point down the line – there are many public programs where there is a need to take a long-hard look in cost-benefit terms and the political will to tackle this will be greatest when the mood music favors austerity. And I strongly favor having a carefully spelled out and credible fiscal plan – with independent verification alongside a series of measures to support growth. But the balance has to be sensitive to developments in the economy. The problem with the weaker economies in Europe is that they have effectively lost their economic sovereignty. That is not only humiliating but it takes many of the important decisions out of the hands of your own elected politicians which undermines the democratic process. So it is important to stay clearly in control of your own destiny.
4) Do you believe that the political regime of China has played a vital role in its high economic growth? To what extent is there a place for autocracy in the industrialization and economic growth of poor countries?
China faces many challenges and their leadership is aware of this. The growth and poverty reduction that have been achieved are truly remarkable in the sweep of history. China is an autocracy but there are a number of accountability mechanisms in place through the decentralized structures and the way that the Communist party operates. These explain their success in my view. But at some point, it will have to embrace the fact that citizen demands for a more pluralistic political system are likely to become overwhelming. Torsten Persson and I have been arguing that China should anticipate this by strengthening executive constraints, the rule of law and encouraging greater transparency. These are directions of travel but the optimal timing will be very tricky. And apart from general guidance, I don’t think that academic research will be much help in the finer-tuned aspects of this.
5) Your research has a focus on the conditions for a peaceful equilibrium within countries. How do you see the future progression of political and economic institutions in China given the rapid increase in living standards and education? Do you believe reform will be inevitable, particularly in the context of decreasing growth figures?
There is no unconditional answer – it will depend on how the kinds of reforms which I outlined above progress. And there will be some luck involved – since there is vulnerability to a variety of potential shocks. The slowdown in growth is inevitable but how far that will be the result of convergence in living standards or citizens deciding consciously to trade off higher incomes against other aspects of the quality of life is hard to know a priori.
6) Your research work suggests that in U.S., political competition is good for economic performance. Does this result apply to other countries with different political systems? Can political competition give rise to corruption and rent seeking behavior of political parties that try to beat their competitors at any cost (bribes, lobbying, and use of their political power to help their supporters)?
I am a big believer in political pluralism for lots of reasons. Societies that promote free expression are more open/creative and successful in many ways, and these are ways that are not easily captured solely by income levels or any single indicator. But an effective plural and competitive system has a set of underlying constraints to establish a core set of common interests/values. This is what Torsten Persson and I argue is promoted by cohesive institutions in the framework that we developed in out book Pillars of Prosperity. And this is what prevents competitive systems descending into disruptive partisanship where one group or another behaves destructively towards the other when in office. So you need the safe-guards against corruption/rent-seeking separately as the basis for having effective competition. A monopoly on political power is at best a second-best solution when constraints are weak – which might explain why China can work (for now).
7) It is clear that in policy debates the mass media play a crucial role in the determination of public opinion. Do you believe that during an economic crisis, when some immediate but harsh policy measures need to be taken (like Southern European austerity packages), media capture by the government (in favor of these measures) can lead to better political and economic outcomes? In what way should the state guarantee the freedom and the objectivity of the mass media?
You can see an emerging theme. Silencing the media can never be first best in my view. Difficult economic circumstances call for efforts to create broad-based coalitions to make tough and reasoned decisions. There is no need to silence the media when there is enough consensus in the system. But I would also be pretty wary of silencing the media or allowing capture in a polarized society. After all, it is not going to be a social planner making the decision! I pretty much line up with Thomas Jefferson who said “If I had to choose between government without newspapers, and newspapers without government, I wouldn't hesitate to choose the latter." So I would place the burden of proof pretty high and try to get on with building the kind of political consensus on important dimensions of policy if it can be done. And that should help to provide the basis for tough decisions.
8) In your paper with Torsten Persson, “Repression or Civil War?” you conclude with the following sentence: “The ultimate goal is to map political and economic circumstances into our wider understanding of the forces that shape economic and political development”. Particularly in the context of political violence, to what extent can this wider understanding move beyond a theoretical structure and feed through into the active policy sphere?
There are narrower and broader concerns here. The narrow ones involve looking at the specific factors which shape the use of violence in a particular context. Obviously there are tough debates about external intervention which we are seeing now in Syria. And there are examples which have been as broadly successful in Kosovo and Sierra Leone. But the wider issues involve thinking about how the institutional reforms can be put in place to create the kind of cohesiveness that is needed to build sustained peace. A concrete policy lesson, in line with much else that I have argued above, is that constraints on executive power and the rule of law are a priority ahead of running elections. Of course, we are not so great at knowing how to do this whereas we have a framework for conducting elections and monitoring their conduct externally. But just because we know how to do it, does not make it the first priority. So there is a practical research program on creating and sustaining checks and balances which would be a better focus.
9) When comparing development trajectories, economists tend to focus on economic factors like material and human resources, technology, economic institutions, etc. Is it a message from political economy that political institutions are at least as important as these other factors? If so, could you illustrate your response by an example?
There are many. My reading of UK history would give a central place to series of judicious political reforms from Magna Carta onwards that created the conditions to sustain economic prosperity. In line with my argument above, these constraints on executive power existed before open elections came onto the scene in the nineteenth century. Other examples include the trajectories of Eastern Europe before and after the fall of the Soviet Empire. And surely even an arch skeptic would have to buy the argument when it comes to comparing the fates of South and North Korea.
10) Mechanism design has demonstrated its success in the realm of auctions and matching markets. Do you think that it can be applied with as much success in the design of political mechanisms (electoral rules, legislative bodies and so on)?
It is a powerful way of thinking. But it too easily suggests that fine tuning is what matters. Getting basic things right should be what matters and can have a first order effect. So I don’t think that whether we have differences in the details over the rules for legislative organization matters that much even though there is a fascinating set of debates to be had about such issues. What matters is that we have legislators in the first place and that they have the power to act to promote good ideas and stop bad ideas when the need arises. That is the real achievement of Parliamentary democracy. Of course that is perfectly consistent with a mechanism-design perspective, it is just a bit less intellectually refined. Maybe that was something I have become more confident about as a result on having spent time in the messier policy world
11) Could you describe to us your role as a member of the Scientific Council of TSE? How do you see TSE developing over the coming years?
My role is simply to try to provide advice from an external input – maybe some of it based on things that we have done right (and wrong!) at the LSE. I have much optimism. The vision of Jean-Jacques Laffont remains an inspiration and the power of his legacy is plain to see. You are fortunate indeed in having such dedicated people who lead by example and inspire. TSE is already one of the leading centres in Europe and from one SE (LSE) to another (TSE), competition is a good thing – it will keep all of us on our toes!
12) In your view, what are the next big questions to answer in the realm of Political Economy and Development?
There are so many. But one thing that we need to understand better is the framework of norms within which institutions and economies operate. The recent experience of Egypt seems in part to be due to a failure to create a sufficiently strong ethic of common interests within which democratic institutions operate. This is not only down to formal rules – it requires that people accept and live by values of tolerance and decency. Women were poorly treated less than 100 years ago, being denied the right to vote and economic opportunities. The subsequent transformation in many parts of the world serves as a reminder that changes based on shifts in norms can be transformative. So I am convinced that the interdependence of changing norms, institutions and behavior are the key to progress in economic development and in society more generally. If we could understand that properly, it would definitely count as progress!