Monday, January 17, 2005
Dead cat bounce
I hate to disagree with Mitch, in part because he's a lot bigger than me, but I'm not inclined to think so highly of the news of economic recovery in Iraq. Referring to a new IMF report on conditions there that predicted a 52% increase in GDP in Iraq in 2004, 17% this year and a 9% average for 2006-09, Mitch comments,
And there has to be some sense that the people are sharing in the new wealth. Suppose we had an investment boom in Iraq in 2001 induced by Saddam building 10,000 new statues of his own likeness. Would the average Iraqi feel better? Certainly not. So there's an investment boom today, but where's the money coming from, and who is guiding its use in rebuilding the Iraqi economy -- workers and businesspeople? The interim government? The Americans? That's a key question, and not one for which we have a very good answer right now.
Most every successor state of the former Soviet Union put up strong growth figures for a few years after stabilization, and some of them would approximate the figures forecast for Iraq. But that doesn't mean all of those countries are healthy shining beacons of capitalism; it only means that the decline was so far that the recovery started from very low levels, giving nice-looking growth numbers: this is known in finance slang as a dead cat bounce. So too is the case in Iraq.
UPDATE: Mitch replies:
In a technical sense I can answer his question. If we imagine the path Iraq was on if war had not been threatened, took place and the resulting insurgency had not arisen, we would argue that recovery is when we reach that line. Where would that be? I can only guess. But given the economy was already in decline in 2002 because of the vote for war in Congress in October that year, and that at end-2004 we're at 98.8% of the 2002 level, it's safe to say we're not there yet.
But Mitch's point really isn't technical, nor was mine. The question is does Iraq now has a faster rate of economic development with the soon-to-be-elected government and its resulting economic policies than it did under Saddam, and how does that effect living standards for everyday Iraqis? The answer to that question, as I said, isn't as clear cut as I thought Mitch had implied in his first post. Autocrats like fast growth rates, so that they can collect more tax revenues to hand out to their supporters without angering the non-supporters enough to challenge the autocrat. (See most of East Asia in the 1970-97 period.) Shaky democracies sometimes lead to lower growth rates as nobody has an interest in making the economy perform well for the next government if they aren't sure they'll be part of it (sort of describes the Minnesota Legislature, but I'm more thinking Latin America.)
Who will be Iraq's Erhard? I'm more interested in that than who will be its Adenauer.
Two points need to be made. First, even if the 52% number was hit for 2004 -- a figure over which there should be some skepticism -- it is a bounce off of a very low number. The war reduced GDP in Iraq by 35% according to the interim government's letter to the IMF (in which it sought aid), so hitting that number puts us at the end of 2004 at 98.8% of the level at the end of 2002. This in a country with a population growth rate of 3% and per capita GDP around $800/year, is not a good thing. The growth ahead depends largely on Iraq bouncing back to production levels around 3 million barrels per day, from the 1 mbpd after the war ended. So far, that doesn't appear to be happening....there would be no way to project such a boom if the vast majority of Iraq weren't in relatively good shape.
Naturally, there are security issues; duh. But booms are not symptoms on nations where the majority of the workers and businesspeople are worried about getting blown up on the way to work in the morning.
And there has to be some sense that the people are sharing in the new wealth. Suppose we had an investment boom in Iraq in 2001 induced by Saddam building 10,000 new statues of his own likeness. Would the average Iraqi feel better? Certainly not. So there's an investment boom today, but where's the money coming from, and who is guiding its use in rebuilding the Iraqi economy -- workers and businesspeople? The interim government? The Americans? That's a key question, and not one for which we have a very good answer right now.
Most every successor state of the former Soviet Union put up strong growth figures for a few years after stabilization, and some of them would approximate the figures forecast for Iraq. But that doesn't mean all of those countries are healthy shining beacons of capitalism; it only means that the decline was so far that the recovery started from very low levels, giving nice-looking growth numbers: this is known in finance slang as a dead cat bounce. So too is the case in Iraq.
UPDATE: Mitch replies:
However, I have to ask; where does a Dead Cat Bounce end, and recovery begin? As
King himself notes, the story didn't answer a lot of the questions about the nature of the investment or the recovery; so while we don't know that the news is good, we also would be mistaken in insisting it's not.
In a technical sense I can answer his question. If we imagine the path Iraq was on if war had not been threatened, took place and the resulting insurgency had not arisen, we would argue that recovery is when we reach that line. Where would that be? I can only guess. But given the economy was already in decline in 2002 because of the vote for war in Congress in October that year, and that at end-2004 we're at 98.8% of the 2002 level, it's safe to say we're not there yet.
But Mitch's point really isn't technical, nor was mine. The question is does Iraq now has a faster rate of economic development with the soon-to-be-elected government and its resulting economic policies than it did under Saddam, and how does that effect living standards for everyday Iraqis? The answer to that question, as I said, isn't as clear cut as I thought Mitch had implied in his first post. Autocrats like fast growth rates, so that they can collect more tax revenues to hand out to their supporters without angering the non-supporters enough to challenge the autocrat. (See most of East Asia in the 1970-97 period.) Shaky democracies sometimes lead to lower growth rates as nobody has an interest in making the economy perform well for the next government if they aren't sure they'll be part of it (sort of describes the Minnesota Legislature, but I'm more thinking Latin America.)
Who will be Iraq's Erhard? I'm more interested in that than who will be its Adenauer.
