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Saturday, May 26, 2012

Who's the problem: People or politicians?

The winners of last Sunday’s elections in Greece and France would do well to consider “Juncker’s Curse.” It’s named after the Prime Minister of Luxembourg, Jean-Claude Juncker, who famously quipped: “We all know what to do. But we don’t know how to get reelected once we've done it.” Juncker would know. He’s the longest serving democratically elected head of government in the world. But it raises an interesting, philosophical question. Is populism our greatest obstacle to growth and success? Are world leaders really just sitting on solutions to all our problems – but they can’t implement them because of us? In other words, are people the problem, and not politicians? A few recent events make one wonder. Exhibit A: Nigeria, the world’s 8th largest exporter of crude oil. Until the end of 2011, gasoline prices in Nigeria averaged $1.70 a gallon – less than half the U.S. average, and nearly a third of prices in India and China. But cheap oil came at a heavy price: Nigeria was spending $8 billion a year to subsidize gasoline – 4% of GDP. Rolling back those subsidies would give the government funds to build refineries; those new refineries would in turn make Nigeria a more effective exporter of refined crude, generating far more wealth. The International Monetary Fund – as well as many other economists – all agreed that cutting subsidies would be a vital first step towards fixing Nigeria’s finances. So Lagos boldly decided to double prices. Suddenly, on January 1, 2012, a gallon of gasoline was worth $3.50. Riots ensued. But President Goodluck Jonathan vowed to stand firm – after all, this was a decision that was good for the people, right? It took sixteen days to cave. The government dropped prices much of the way back down, to $2.27 a gallon. It seems Jonathan backtracked in time. A Gallup poll from April shows he has an 81% approval rating. If there is a moral, it is this: You can break promises you never meant to keep; but never, ever take away a gift you’ve already given. The story isn’t new. Jordan’s government reversed similar cuts last year in the face of protests. In Venezuela, if gasoline costs $0.18 a gallon – less than bottled water – it’s not because President Hugo Chavez likes being generous. The last time a leader there tried to raise prices, in 1989, all hell broke loose. Hundreds died in riots. In India last year, a proposal to allow Walmart to enter the country was met with mass strikes – despite the fact that economists agreed it would revolutionize the market and increase supply-chain efficiency. One could go on. For all of these countries, subsidies or nationalist policies can be a populist, short-term crutch. They tend to skew markets and hold back investment in infrastructure and wide-scale development. I put that to Ken Rogoff, a Harvard economics professor who was once chief economist at the IMF. He says that almost everywhere, people want the government to deliver more while paying less. “The problem isn’t nearly as much the politicians as the voters. Every poll you look at shows the public has huge expectations of what the government can do for them. And it’s just not possible.” So is Juncker right? There is a flipside, as Rogoff himself pointed out to me. The issue isn’t just economics – it’s trust. Just ask the Nigerians. Transparency International ranks the country #143 in the world on corruption. No surprise then, that the rioters weren't convinced oil money would end up in the right hands. The deficit of trust isn’t limited to countries perceived to have high levels of corruption. Let’s go back to Greece and France’s elections last Sunday. Nobel Laureate Paul Krugman diagnosed it as a vote against policies – against austerity. “Europe’s voters,” he wrote in the New York Times, “are wiser than the continent’s best and brightest.” So maybe the people do know what’s best for them? The most heartening thing I heard this week came from an eastern neighbor of France and Greece. The Czech Republic’s Foreign Minister was lamenting the mood of anti-incumbency around the world. “The next elections are lost anyway,” said Karel Schwarzenberg to the Financial Times. “I should be astonished if we won. And in that case, if you can’t keep power, you should do what you promised to do.” Now there’s something both the people and the powerful won’t disagree on.

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