* Time to rein in Tinawallahs

In formulating policy, the process and the mindset can have a significant impact on the success or failure of outcomes. How you do it can be as or more important than what you do.

Mohamed A. El-Erian, CEO and co-CIO of PIMCO and Michael Spence, economist
 
In today’s western economies, this observation may go a long way in explaining why policy outcomes have consistently fallen short of what policymakers themselves have expected, let alone what is needed to address important and growing economic challenges.

Signs of disappointing policy outcomes are, unfortunately, all around us. Over the last two years, American policymakers have failed miserably to lower persistently high unemployment despite a series of stimulus measures, fiscal and monetary, conventional and unconventional. In Europe, the debt crisis has spread despite numerous summits, declarations, policy actions and political changes.

In both cases, policymakers identified and sometimes mis-identified the problems and took highly publicized steps to solve them. Considerable financial resources and political capital were deployed. The credibility of policymakers (and policymaking itself) was placed on the line. Yet to no avail. The identified problems not only persisted, they deepened.

When one compares policymaking episodes around the world – successful and less so – it seems clear that there is more at play than the content of policies. The mindset of policymakers and the process of policymaking seem to also have a lot to do with the disappointing outcomes. Indeed, one often hears policymakers point to political dysfunctionality as being the major hindrance to good outcomes.

In the US, it is the highly polarized nature of the political discourse and the associated lack of a “center.” In Europe, it is the need to get universal approval from the seventeen members of the Eurozone in what is often a cumbersome process that pits European necessities and realities against national interests and individual political party posturing.

As valid as the political constraints may be, we believe that there is something even more fundamental at play. It is not just about politics. In the last few years, the policy mindset has been unhelpful and, as a result, the sequencing outmoded.

Western policymakers have been hostage for too long to a cyclical mindset. Their economies have been going through structural and secular changes brought about by major re-alignments at the national, regional and global level. Repeatedly, the extent and duration of the ongoing economic changes were not sufficiently understood and embraced. As a result, economies have suffered rather than evolved.

Sequencing has also been problematic. Too often, in both America and Europe, policymaking has started with the available set of policy measures and asked what can be achieved. As a result, the process has been overly constrained, unimaginative, at times timid, and excessively slow to adapt to shocks and structural shifts.

In this area, the west could learn from the experience of developing countries. Whether they like it or not, these countries have traditionally lived in a secular space with constantly shifting non-cyclical internal and external structural forces at work. Policy formation has had no choice but to adapt to this reality and, in some countries, has done so very effectively. Indeed, both policy mindset and sequencing have evolved in a manner that has allowed for better outcomes – not only when it comes to moving forward with determination, but also in showing greater resilience and higher agility in the face of both positive and negative shocks.

In simple terms, here is how it works. Policymakers identify a multi-year destination — a “vision”. It is explained widely, discussed broadly, and repeated often. It is characterized by both quantitative and qualitative elements. Then policy priorities are set with the goal of coming as close as possible to achieving the multi-year end-point.

From the start, there is explicit recognition that – by the very nature of the dynamics, and especially given the fluidity of the global economy – not every step of policymaking can be specified ex-ante consistent with the destination. Instead, it is about identifying the first series of steps and then evolving appropriately and responsively. This evolution involves a process of continuous learning, midcourse corrections, experimentation, and the development of new instruments. Act and learn, rather than debate and wait, best describes the approach.

The government’s role, as legislator, regulator and influencer of economic behavior is clearly defined as supporting private sector dynamics and adjustment. Like the market side of the economy, it adapts to the constantly shifting structural reality.

Some will be tempted to dismiss these approaches by characterizing them as returning to the “bad old days” of “central state planning.” It is not, and they should think twice before doing so.

What we are talking about, and what we have observed in some countries around the world, is more akin to the effective strategic planning that goes on at the level of a successful private sector company. Indeed, it is essentially what has marked the brilliance and success of great corporate leaders, including the recently deceased Steve Jobs.

If we get the policy making process right, the potential benefits are huge.

In the US, there is a massive buildup of investible cash in the corporate sector, a resource waiting to be used. There is also a large and growing pool of unemployed labor, another resource waiting to be used. A better policy process can bring these two together in a very effective manner.

Any five year destination plan includes a detailed restoration of growth and job creation coupled with the rebalancing of the economy and with an expansion of the tradable sector, employment and competitiveness. There are skills, educational and infrastructure deficits to be overcome, and regulatory impediments to remove (including tax policy that adversely affects growth and the productive deployment of the two key underutilized resources). Government’s role is to close the gaps and deficits. The optimal mix of reforms and policies that will work is not necessarily known in advance. Instead its about starting a process and learning from it — and, in the process, avoiding and mistrusting simple formulas and claims of a policy “killer app.”

In Europe, the process should start (rather than end) with a very explicit determination of what the Eurozone should look like in 3-5 years. Does it involve a fiscal union among the seventeen existing members, supported by much deeper political integration and much greater delegation of national sovereignty to the regional level? Or does it involve a smaller, less imperfect union of countries with similar initial conditions? Once this is decided, it will be much easier to move aggressively on the other parts of the required solution.

Whether it is Europe or the US, the welfare of citizens – indeed, the well-being of the global economy – requires much better pragmatic and adaptive policymaking. The more this is delayed, the greater the social damage is associated with subdued economic growth, persistently high unemployment, recurrent financial crises, and growing income and wealth inequalities. A fundamental review and reform of “how” policymaking takes place can go a long way in improving outcomes.