On Incentives

"Never penalize those who work for us for mistakes or reward them for being right about markets. It will go to their heads, is counterproductive and, in any event, material compensation will not correlate with their ability to predict the future next time."

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Notes for Economic Strategy Institute Speech

  1. There are no impediments, no financial architecture problems which inhibit the role of the international organizations.  Extremely broad charters—to do what they wish.
  2. Can lend, give away, subsidize, charge market rates, guarantee the private sector, equity or debt, long or short term, with or without conditionality, fixed or floating, quick disbursing or over 10 years.
  3. The financial/legal architecture, the power is in place.
  4. There are literally hundreds upon hundreds, if not thousands, of economists, agronomists, political scientists, social scientists covering every known economic, financial and political theory in the World Bank and IMF.  There are no secret magic ideas which haven’t been vetted, considered and debated – fiercely.
  5. If despite this the IFI’s do not solve all problems or any particular one, why no “reform.”  It is for one of three reasons:

    First, they are minor bit players, and their intervention is too insignificant to make a difference.  They are overwhelmed by other forces at play.

    Second, governments or the private sector or the staff reject the intervention as being too costly, or unwise or would do more harm than good or politically impossible to implement or simply in their view would not work.  In short, the votes were ––are—not there to support a given policy or intervention.  The governments of the world and the private sector simply are not yet quite ready to cede their power, their votes, their independence, their sovereignty, their taxing power, their veto power, their credit standards, either to the protestors in the streets or to the professionals in the international agencies – even assuming the latter speaks with clarity, consistency, and one voice or even to those in this room who have the answer.

    There is a third reason why intervention on a policy or reform is not taken either before a crisis occurs or in response to one.  We simply do not yet have a model which explains and predicts contagion, or how we can know the end result of a series of events which have a far closer resemblance to a pinball machine or chaos theory than to Aristotlean logic.  Russia can’t meet a debt service payment, therefore Japanese banks in response, reduce their lines of credit to Korea, which prompts a huge withdrawal of short term funds all over the world from Korea, collapsing their economy, and by contagion, that of Thailand, which in turn affects market values in Latin America, and when, in response, U.S. Government bonds, held as collateral on sovereign debt are sold, interest rates rise in the U.S. hurting the U.S. stock market.  Unpredictable events, unpredictable outcomes.  Uninsurable.  The most thoughtful simply do not know whether or how one institution—one variable if you will—can offset or neutralize the effects of a series of apparently unlinked events.  Besides, there are coups, wars, unpredictable inflow and outflow of private capital, commodity over-supply and under-supply, technological changes, assassinations, earthquakes, revolutions and factors we cannot identify, even in retrospect, which have been followed by “success” or “failure.”  I do not even say “resulted in success or failure” because we do not have a formula—even looking backward—let alone the daring—to ascribe either a positive or negative impact of a particular set of interventions by one or two institutions like the World Bank or IMF.

    You see, if we knew how any one institution or variable had an effect and how it overcame all other factors, we could assign blame or credit.  No such luck.  If we could, we could predict outcomes of particular policies.  No such luck.  One week before the crises in the U.K. and France in the mid-nineties, or the Mexican crises or the collapse of the Russian ruble or the Asian crises, no one inside or outside the international agencies had a clue about what was to happen.  And even after the events occurred, the wisest commentators could not explain “how come.”  How come everyone decided at one time—at that particular time—to pull their short term money out of Korea or Indonesia.

    The men and women who recommend what to do are very smart.  They are wise; they are decent; they are informed and knowledgeable; most important--they are motivated to do the right thing and resolve the problems—which directly affect adversely 10’s of millions.  How many stones are we to cast because often they simply do not know what will work in a very complicated world.  Or do you believe there is someone out there or here who does know, has the answer, the magic secret and no one will listen.