Dispatch

'Stinginess Is Cool'

Berlin has been portrayed by Washington as the selfish bogeyman of the global recession. But Germans aren't being cheap: They're being themselves.

Judging from the recent comments of U.S. policymakers and commentators, it's not hard to pinpoint the greatest impediment to global economic recovery: the know-nothing, beggar-thy-neighbor policies of Germany. Policymakers in Berlin are portrayed by everyone from President Barack Obama to New York Times columnist Paul Krugman as single-mindedly focused on increasing their country's exports and keeping down domestic demand, even at the expense of prolonging or deepening the global recession. Why can't the Germans just reach into their pockets and support global consumption at a time when the United States and other indebted countries have to exercise restraint?

The problem is it's a lot harder than you'd think to get Germans to spend their money.

Thrift is practically part of Germany's national identity. A recent commercial ad campaign ran with the claim Geiz ist geil -- "Stinginess is cool." And the statistics bear out the slogan. In 2009, the savings rate of the private sector stood at 22 percent of GDP, compared with 12 percent in the United States. Private consumption expenditure rose 0.2 percent between 2002 and 2006, while it increased 3 percent in the United States and 2.7 percent in Britain. Polls show that Germans prefer having their taxes raised and public spending cut: It is hard to imagine a government in any other country overstating the size of an austerity package for the sake of popularity. In Germany, that's precisely what just happened.

 

Cultural factors play an important role: Whereas the Anglo-Saxon world is characterized by what one could call pragmatic optimism, Germans instinctively think about the long term, and they aren't disposed toward cheerfulness. Whereas America's recent history teaches hope, Germans see in their history the need to be cautious: In the last 100 years, Germans have experienced two currency reforms and the rise and demise of three regimes.

Political instability isn't much of a concern anymore, but the mindset remains. Germans today still think of credit as morally dubious, if not pernicious. It's telling that the German words for debt and guilt are identical: Schuld. And German consumers instinctively think of bad times as just around the corner, so they save money as a precautionary measure against the next crisis that's sure to come. For instance, with the country's population now rapidly aging, many Germans are saving money in anticipation of the imminent demise of their pay-as-you-go public pension system. In fact, Germany is likely the only country in the world where Ricardian equivalence -- the theory that the government cannot stimulate private consumption by cutting taxes because rational actors know that taxes will eventually have to rise again and therefore put aside savings -- actually holds true.

It's not only Germans' propensity to save that's at issue, but their easy assumption that economic activity consists primarily of foreign trade. It's an economic model that traces back to the beginning of the postwar period, when booming exports were the backbone of the Wirtschaftswunder, or economic miracle -- the period of strong growth in the 1950s that transformed the destroyed country into a major world economic power. When Germans saw Volkswagens on roads all over the world, it wasn't only a source of income, but proof that the country was once again an accepted member of the international community. Add Germany's traditional obsession with engineering and its distaste for the service sector, and it may become clearer why the country is prone to mercantilism.

Germans have embraced this outmoded economic formula, even though it has essentially imposed years of mild austerity measures on the country. To boost exports, Germans have had to increase their competitiveness through stagnant labor wages. Unit labor costs fell 0.1 percent between 2002 and 2006 in Germany, while they rose an average of 1.6 percent in the eurozone. But Germans don't rebel against that lack of wage growth; they join the country's economic establishment in interpreting it as a strength. Indeed, the major trade unions were involved in negotiating the wage levels.

If German psychology is one reason for the country's surplus savings, the reluctance of the country's policymakers to use macroeconomic tools to change spending patterns is the other major contributor. Germany simply does not have a tradition of macroeconomic policy, at least not in the American sense of managing aggregate demand. Contemporary German economics has its roots in Ordnungspolitik, a unique school of thought that emerged in the 1940s and for which there is no English translation. Ordnungspolitik accepts that government intervention is necessary for the economy to function properly, but the role it assigns to the state is fundamentally different than in the Anglo-Saxon tradition. Whereas most American macroeconomists believe in discretionary intervention in the way of countercyclical monetary and fiscal policy, German economists encourage the government to only alter the framework within which economic agents interact.

The emergence of Ordnungspolitik -- with its obsession with rules and skepticism toward discretionary action -- was a reaction to the excessive abuse of governmental power experienced during the Nazi years, but it also reflects another fundamental German preoccupation: The idea that it is better to design a system that works perfectly than to resort to permanent ad hoc troubleshooting.

From this perspective, swings in the business cycle are a natural phenomenon of a market economy, and given the complexity of economic processes, any attempt to smooth them out will lead to a misallocation of resources. The very idea of stimulating the economy or producing domestic demand sounds strange to many German economists. The solution to the problem of global imbalances advanced by their U.S. counterparts -- expand demand in the surplus countries in order to compensate for the decline in deficit countries -- is seen as the application of a blunt instrument that, however much it helps, will ultimately distort the global economy for the worse.

Even in the heyday of Keynesianism in the 1960s and 1970s, Germany's economic establishment regarded with skepticism the government's attempts to manage aggregate demand. When Chancellor Helmut Schmidt gave in to pressure by then-U.S. President Jimmy Carter and launched a stimulus package amounting to 1 percent of GDP at the 1978 G-7 summit in Bonn, Germany's central bank, the Bundesbank, reacted harshly. For years afterward, bank officials said the stimulus had no positive effect, and the public believed them. Economic historians have been benign in their assessment of that stimulus package, but German policymakers would probably still cite this episode as proof that countercyclical policies are bound to fail economically and politically.

Indeed, Germany's greatest struggle may be to overcome the legacy of its famously independent postwar central bank. Germans have a well-known obsession with inflation, but what Americans don't often appreciate is how responsible the Bundesbank is for that affliction. It's true that the 1920s period of hyperinflation, not the Great Depression of the 1930s, is the defining moment of recent history for German economists. But that cultural memory of the effects of loose money is not as strong as some Americans sometimes suggest -- after all, it was the downturn of the 1930s, not the loss of value of German currency in the 1920s, that brought Adolf Hitler to power in 1933. In point of fact, it was the postwar Bundesbank, with its almost theological focus on price stability as the prime goal of economic policy, that anchored inflation angst in the collective memory.

In pushing their anti-inflation line, Germany's central bankers were not only motivated by conviction, but also institutional self-interest: By staking such a hard line, they managed to claim more influence for themselves in the West German political order. Germany's contemporary fear of inflation is the product of an invented history -- one that the mythmakers themselves came to believe.

Americans are welcome to put pressure on Germans to consume, but it's likely to be in vain. As long as they find someone in the world to buy their products, Germans will choose to export and save. They are all too eager to send off their Porsches to other countries, even if they don't know what to do with the money they get in return. Germany will probably find itself again putting its excess cash into bad investments, just as it ended up holding much more than its share of worthless Lehman Brothers securities. If that isn't enough to change a country's economic habits, then nothing will be.

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Dispatch

A Tremor for Haiti's Aid Industry

The earthquake was only the latest disaster to capsize the country's already fragile local aid economy. Now outside organizations are threatening to overwhelm it entirely.

On the second floor of a modest white house on a rutted road in Cap Haitien, 20 or so workers are busy at their workstations, churning out upwards of 3 tons of peanut butter (mamba in Creole) per month. But this is no ordinary peanut butter. It's Medika Mamba, a thick paste used to combat childhood malnutrition. It requires no cooking, refrigeration, or rehydration, and it can be administered at home. It is homemade Haitian in a way that most products are not these days: It uses local workers and peanuts from local farmers, and it rehabilitates Haitian children. In other words, it was the ideal thing to have around in the aftermath of the Jan. 12 earthquake.

But aid agencies didn't buy it. They had failed for 2½ years to audit the plant, a requisite for procurement, and so instead, they imported their own stuff: a similar supplement called Plumpy'nut. The result? Even before the earthquake, the market for so-called ready-to-use therapeutic foods (RUTFs) was flooded -- and Medika Mamba wasn't able to compete. And while the needy children were still getting fed, it was a major blow to the mamba-producing Meds & Foods for Kids (MFK) factory and its local employees.

Unfortunately, the Medika Mamba tale has been far too common in Haiti for years, emblematic of what has been wrong with foreign aid. Local producers can rarely compete with the influx of food, medicine, and other supplies that aid agencies bring. This is part of the reason why today -- after decades of aid dependence -- Haiti has almost no local economy for these goods.

When RUTFs were first created in 1999, they were seen as a major step up from old malnutrition remedies. In 2007, a consortium of major aid agencies, including the World Health Organization, UNICEF, and the World Food Program, declared it the gold-standard treatment for severe acute malnutrition.

Gold standards can, however, lead to gold rushes. Nutriset, the private French corporation that makes Plumpy'nut, the world's most popular RUTF, saw its shipments rise almost threefold from 2007 to 2008; last year, it sold $72.3 million worth, mostly to UNICEF.

The efficiency with which Nutriset was able to turn out Plumpy'nut, scaling up production to meet demand, would have been unimaginable in Haiti. Most Westerners can't imagine the tangles, snarls, and vexations that characterize any type of production there. Farming practices are ancient, roads are awful, people lack education, and electricity and water are not free. The majority of peanut farmers are smallholders; even if they had tractors, they wouldn't have plots large enough to use them on. Farmers prepare the soil with pickaxes and hoes. So by the time MFK buys peanuts locally from farmers near Cap Haitien, they cost between $1 and $1.50 per kilogram -- five times the U.S. price. And because farmers lack disease-resistant seeds and fungicides, such as those used in the United States, MFK has to throw out about 30 percent of the local peanuts it buys.

Given all this, it was no surprise that MFK struggled to compete when Nutriset established a Plumpy'nut franchise in the Dominican Republic, right next door to Haiti. But the next-door plant was not the real reason why MFK was shut out of the market. The trouble was the audit.

The saga started in 2007, the same year that the aid agencies declared RUTFs the best-available treatment for severe acute malnutrition. Later that year, the consortium established a food-safety audit process and charged Doctors Without Borders and UNICEF with inspecting manufacturers who wanted to supply the stuff. By then, MFK had been making Medika Mamba in Haiti for four years, and it asked UNICEF for an audit.

According to MFK, UNICEF dithered and finally pawned the audit off to Doctors Without Borders at the end of 2008. In the middle of the audit, Doctors Without Borders changed tack, creating a new committee for food-safety inspections; shortly after, the organization's auditor left his position. Unaudited, MFK could not bid on most RUTF contracts, but it continued to supply Medika Mamba to non-consortium agencies, including Catholic Relief Services and World Vision. Then late last year, MFK finally got a seal of approval from Supply Chain Management System, a contractor for the U.S. Agency for International Development, though Doctors Without Borders and UNICEF still didn't recognize the audit.

UNICEF spokesperson Edward Carwardine said in an interview that, while Medika Mamba met quality requirements, UNICEF prefers single-dose sachets to larger bags. Another UNICEF spokesperson told me that the organization had found a sample of Medika Mamba to be poor quality because the oil separates from the paste, like all organic peanut butter. But neither a packaging requirement nor an emulsification requirement is outlined in any published standard. And in fact, some Plumpy'nut comes in multidose servings, which some nutritionists prefer because mothers are less likely to resell it in that form. MFK says UNICEF did not inform it of the emulsification complaint.

A former advisor in UNICEF's supply division, Stephen Jarrett, said via email that UNICEF doesn't inspect RUTF facilities from which it has no intention of procuring. And after the earthquake there was nearly enough Plumpy'nut to satisfy demand; private entities like the Clinton Foundation donated more in the weeks that followed.

Whatever the rationale for not auditing MFK, the result was clear -- MFK became yet another Haitian producer unable to compete in the aid market. It's a contest that, to Haitian producers, often seems rigged: Aid agencies are accustomed to big global suppliers; imports are often cheaper (in some cases because they're subsidized or donated); and exporters encounter none of the headaches of production that occur in Haiti daily.

In recent years, local production has become a pressing matter. The issue ignited after the April 2008 food riots, when President René Préval decried Haiti's vulnerability to global commodity price swings; his reluctance to subsidize the price of imported rice contributed to his government's downfall. After January's earthquake, politicians reiterated the call for national production, with Préval halting food aid in the tent cities. Eighty percent of rice consumed in Haiti is imported, whether as aid or trade, and, according to the government, the country spends most of its foreign exchange on food. That foreign food pushes market prices down. As a result, the 50 percent of Haitians who subsist on agriculture are priced out of the market, condemned to the paltriest subsistence farming imaginable.

If aid groups were to buy locally, it would be a good start. Of course, that's not to say that it would be easy. The World Food Program had boosted its purchases of local rice and other foodstuffs before the earthquake and continues to do so. But Haiti's inefficiencies are never far from view: Haitian rice costs more than Pakistani rice, for example, so the World Food Program must get special clearance to contract with a bidder whose price is not the lowest. So far, it has been able to buy only 1 percent of its rice locally.

MFK's way around this problem has eventually come, at last. It will soon become a part of Nutriset, which will in turn shut down its Dominican factory. MFK founder and director Patricia Wolff says one of the major advantages of joining Nutriset is the credibility it gives MFK with UNICEF, the biggest potential buyer. The MFK facility will probably be audited at last and will be thus able to compete for the kind of large contracts that would make it sustainable. "Our idea was to build a model that was replicable," Wolff told me. "But humanitarian international buyers have never bought from the national producers. So maybe, the lesson is, it's not sustainable."

ROBERTO SCHMIDT/AFP/Getty Images