An Economist Rescues Democracy
Volatile Bangladesh pins hopes on an economist Associated Press proclaimed this month, headlining the story of how the country’s former central bank head Fakhruddin Ahmed was called in to lead its interim government and rescue scheduled elections.
In fact, Bangladesh turned not once, but twice, to an economist to resolve its political deadlock. Dr Ahmed, who worked at the World Bank after his economics PhD from Princeton, took the job after it was turned down by Professor Muhammad Yunus, awarded this year’s Nobel Peace Prize for pioneering micro-credit at the Grameen Bank.
But why would you look to a professional economist turned central banker, with no past political experience, to take over the reins and sort out the warring party leaders? That word ‘volatile’ has a lot to do with it. Financial markets worst enemy is ‘excess volatility’ the movement of share and debt prices by more than seems warranted by latest news. To calm expectations, and stabilise prices, central bankers don’t only need to align monetary policy with inflation or credit growth targets, and pressure governments to do the same with its fiscal policy. They also need to look credible, appearing to know what’s happening and how to handle it. The avoidance of financial panic at the onset of political chaos did much to propel the new acting leader into his post.
Also useful for Dr Ahmed electorates tendency, when faced with raucous and rule-bending politicians, to welcome a temporary takeover by technocrats. Especially those with central bank experience, are unusually comfortable in that role. They focus on incentives and constraints that shape people’s behavior, whatever their preferences and political beliefs. They point out aggregate trends and forces that push business and government in particular directions, regardless of the preferences of those leading them. Several Eastern European countries were steered through recent political crises by central bankers, promoted to acting prime ministers after disgraced or despairing politicians stepped aside.
What economists lack in political experience, they can try to make up for through detailed theory on bargaining, coalition formation, non-cooperative games and collective choices. Of course, being able to draw the political learning curve is not the same as ascending it. To apply such theories successfully to the present situation, Dr Ahmed may need to know how many of the politicians he deals with have studied the same theories, and share the same expectation of the pay-offs. But if he fails, it will be easy to blame this on irrationality of the heads he was called in to knock together. The heuristics and biases that cloud rational judgement under uncertainty are now widely enough recognised to have won discoverer Daniel Kahneman the Nobel economics prize (with Vernon Smith) in 2002.
If he succeeds, and stays in politics, the interim leader may have something to say about the economic and social problems underlying the present crisis. These include, according to the International Crisis Group, “a non-functional parliament, entrenched corruption weak judicial and law enforcement agencies poverty, illiteracy and poor development indicators for women.” Economists have plenty of theories and evidence on what stops parliaments functioning, how corruption blocks useful transactions, why judicial weakness holds back investment and growth, why poverty, illiteracy and neglected women’s rights are as much a cause as a consequence of low and unequally-distributed national income. While success in the job will allow Fakhruddin Ahmed to leave it next month, many will be hoping for a sustained assault on these economic weaknesses, to stop the past month’s political crisis occurring again.
Further reading:
- “Bangladeshi Leader Consolidates Power” The Guardian, 14 January 2007
- “Volatile Bangladesh pins hopes on economist”, Globe and Mail, Toronto, 13 January 2007 (subscription required)