Charles Calomiris studies why equilibria break. He is an economic historian and an expert on financial crises, and Elena Panaritis brings him a question fitted to that specialty: everyone from Gen Z to the G7 is now questioning whether capitalism works, whether economics matters, whether banking and finance deserve any trust at all. Is the criticism valid?
His answer starts by zooming out two hundred years.
The hockey stick, and what made it possible
Economic historians call the period after 1800 “the hockey stick.” For all of human history before it, economic welfare per capita hovered near subsistence and stayed roughly constant. There were improvements here and there. There was never perpetual growth.
What changed was not technology alone. It was a regime — one in which markets can operate and rights exist, both economic and political. Under those conditions the world saw enormous and continuous progress.
Calomiris is insistent that this is not a story about Britain and America:
“It’s about Chile. It’s about Korea. It’s about Thailand. It’s about Botswana. It’s about Japan. And that has absolute relevance for poor people still.”
He points to the 1990s as the decade that settled a live argument. Before it, there was genuine doubt about whether trade and market openness could be transformational for poor countries. The experience of the 1990s and early 2000s put that question to rest. Structure your institutions to participate in global capitalism, and you get growth that is transformational for poor people — not merely for the rich.
His summary judgment is unusually strong for an economist: we have never seen an example where you structure the good institutions and improvement doesn’t happen. It always happens.
What poverty became
Panaritis accepts the win and immediately complicates it. Yes, extreme poverty has fallen — though much of that owes to advances in technology and medicine. But what used to be called poverty has not disappeared. It has changed shape, and grown.
It is now called informality, and roughly 70% of the world lives inside an insecure structure.
Calomiris’s response is to reach for the most foundational result in his own discipline — and to correct how it is usually taught.
Ronald Coase is best known for the Coase theorem. Many economists, he says, misread it as a claim that economic progress will always happen because people will always find a way. That is not the point.
“The point of the Coase theorem is that economic progress can’t happen if property rights aren’t well defined.”
Every economist is taught this. Which raises the question almost nobody asks next: where do property rights actually come from?
Panaritis notes that those of us educated in wealthy countries simply assume we live somewhere they exist. Calomiris draws the distinction the entire episode rests on:
“They can be there as a statement of the law. That doesn’t mean they’re there in practice.”
Two institutions in search of a mission
This leads to Bretton Woods, and Calomiris does not spare it.
The IMF’s greatest achievement, he argues, was its first: re-establishing the foundations that allowed international trade to occur after World War II. That was a genuine accomplishment — the plumbing of global trade. But once the fixed exchange rate system it was built around collapsed, the Fund has been searching for a purpose. His verdict is blunt: it has become “the slush fund of the G7 finance ministers.”
The World Bank, in his telling, started from a mistaken premise. It was founded when global capital markets did not exist — they had existed before World War I, then vanished amid war, depression, and the collapse of international trade. Its model was therefore mechanical: supply capital to countries, and development follows like a recipe.
Panaritis presses on whether the paradigm still fits. Bretton Woods assumed institutional fundamentals were in place and concentrated on rebuilding physical infrastructure — water, roads, bridges. Calomiris agrees the assumption was never sound and adds that the Bank, too, now functions largely as a G7 slush fund.
But he refuses to make this a counsel of despair, because the world stopped depending on those institutions.
His illustration comes from Mexico, where he worked on a World Bank mission and later returned as a private consultant. The banking regulator had Chilean advisers on hand — and that, he says, is where the good advice came from. The Chileans had learned the hard way through their banking crisis of 1981–83, then became the first to reform banking regulation effectively in the mid-1980s. They have been teaching Latin America and beyond ever since.
The real teachers are practitioners who have already done the work.
Cardoso, and the anatomy of leaving a bad equilibrium
The heart of the episode is a question about mechanism: what actually lets a country escape corruption and informality?
Calomiris names Brazil. A country with the worst hyperinflations on the planet and a near-total absence of rule of law for two centuries. Then Fernando Henrique Cardoso’s reforms in the 1990s made a durable difference — extreme corruption became substantially less corruption, and inflation has stayed low for nearly three decades.
The obstacle he identifies is psychological before it is technical:
“The number one problem is that people have to believe their participation in the reforms could possibly work.”
Panaritis supplies the word: trust.
What made Cardoso effective was not a policy but an act of articulation. He described the existing equilibrium — the corruption, the missing property rights, the bad public and private governance — in terms every Brazilian already recognized. He was giving voice to their common perceived beliefs. Then came the harder part: describing a different equilibrium, and the path between them, with examples.
The concrete demonstration was a program paying mothers to send their children to school.
Calomiris’s point about it is counterintuitive and worth sitting with. That policy produces no economic benefit for twenty years. The economy will not grow in the next three years to make the president look good at re-election. Which is precisely the signal:
“I believe in real inclusion, and I’m going to do it in a way that I can’t get any benefit from.”
He paired it with a second leg — fiscal responsibility — and a line that functions as a permanent test for voters: every politician who tells you that you don’t need to be fiscally responsible is a thief and a liar. Including me, if I tell you I’ll make you rich in four years.
Brazil has had ups and downs since. Calomiris’s argument is that some of the change proved irreversible anyway.
Democracy as clientelism
Panaritis brings her own experience as a policymaker and, at one point, a politician. What she found was that history determined everything — the number of players involved in a transformation, some obvious and some latent, and the count of historical interventions that had blocked property rights reform before. Map those, and you can see which levers actually move.
Her diagnosis of the political culture is bleak and precise. No citizen trusts the state. Voters everywhere she has worked expect the politician they elected to return the favor of the vote:
“Today we cast a vote as a client. We’re expecting something, it’s a short-term expectation, and the politician we just voted for had better remember it.”
Democracy, she suggests, has drifted a long way from what it was when Pericles built the Acropolis.
Calomiris agrees this is the common case — and locates transformation exactly at its exception. Real change happens when a politician adopts a different role: not the manager of a clientele, but the leader of a country.
He explains why corrupt equilibria are so stable. Look around, and everyone is doing the same thing. Participation is universal, so ending it is unimaginable.
“Informality is a stable equilibrium,” Panaritis says.
“Very stable.”
What property rights did for women in Peru
The counterweight to a stable bad equilibrium is showing people what the alternative feels like. Here Calomiris turns to Peru and to Panaritis’s own reforms — a country that endured hyperinflation of a million percent a year and a 17% GDP contraction, and that has cycled through a startling number of presidents in a decade, yet whose middle class grew substantially on the back of property rights implementation.
Panaritis interrupts on terminology. She dislikes calling them reforms: in law the rights already existed. They had simply never been implemented.
Then Calomiris gives the detail that makes the abstraction human. Secure property rights had a major effect on women’s participation in the labor force and on children’s ability to attend school. The reason is almost embarrassingly simple.
Without a proper ownership right to their home, someone had to physically stay in it to guard it. When the mother went to work, a child stayed behind.
A title deed put that child in a classroom.
And once people have experienced genuinely good institutions, Calomiris argues, they defend them. They may elect all sorts of people afterward, but they will not give this up.
“Why do you think Greece can’t do what Hong Kong did?”
The conversation is taking place in Greece, and Calomiris ends with a challenge aimed squarely at it.
He has been making the same argument since the Greek crisis: you are frustrated with corruption and the shadow economy, and it is a real problem — but do not give up.
“Why do you think Greece can’t do what Hong Kong did? Why do you think Greece can’t do what Brazil did?”
Hong Kong in the 1970s was among the most corrupt places on the planet, and changed through institutional reform. Botswana disproves the claim that Africa is uniformly a basket case. When Brazil imprisoned a former president, many concluded that politicians are criminals. Calomiris insists the correct reading is the opposite: for the first time, someone went to jail. The legal system changed, and the change persisted.
None of this is trivial, and none of it is easy. But it is not something that cannot be done. The method is unromantic — study what worked before, then build a process that imitates it.
He closes on the constraint that decides everything. Greece has a parliamentary supermajority and could make real change. The question is whether it has someone willing to play Cardoso: to prioritize long-term institutional change over payoffs to constituents, and to articulate a credible vision out loud.
Panaritis adds the warning from the inside. Power, she says, is intoxicating — like suddenly becoming a drunk. The value of Reality Check analysis is that it forces a sober moment daily, by showing how previous leaders without appetite for reform actually failed.
Calomiris names the same trap in operational terms: every day the phone rings with a pressing problem about today. A real leader has to carve out space for long-term reform as the top priority — not blind to today’s problems, but refusing to let them consume the moment.
Does he think it will happen? He does not know. It is rare when it does.
But it can.
Takeaways
- Growth after 1800 was an institutional achievement, not merely a technological one — and the recipe still works for poor countries today.
- The Coase theorem is a warning, not a reassurance. Without well-defined property rights, economic progress cannot happen.
- Law on paper is not law in practice. This gap is where informality lives.
- The Bretton Woods institutions have outlived their original missions. The useful advice now comes from practitioners in countries that reformed successfully.
- Corruption and informality are stable equilibria. Escaping them requires a leader who names the current equilibrium out loud and shows a credible path to a different one.
- Property rights are a women’s and children’s issue. When a home must be physically guarded, someone stays home instead of working or going to school.
- Reform pays out beyond the electoral cycle, which is exactly what makes committing to it a credible signal.
Reality Check with Elena challenges mainstream narratives and reveals the often inconvenient reality on the ground. Watch Episode 3.
