Saturday, December 26, 2009

What kind of state we need?

It is a popular question today, not only for those who try to figure out what kind of social system (or in case of conservatives state, authority, society etc.) would be the better from the different perspectives of diferent value systems, but for ordinary people. The state is easily seen as a burden, an unneccessary burocratic authority, not encouraging, but restraining the productive skills of its citizens. Too many people had too many disappointing experience with burocrats, seemingly irrational regulations and rules for not to accept also the broader approach to the problem: the state is ineffective, expensive, inefficent, a hindrance of building a better future rather than supporting it.
As this is the case with many generalizing statements, it is too often proved by individual experiences to contradict easily and this post never would claim to be in this position. However, the problem of the state and the burocracy is maybe a bit more complex then the otherwise quite justified everyday complaints and their conclusions would suggest. It is easy to percieve the elminination of "burocracy" (at this point it is only a common reference to state administration in the broadest sense) as something releiving not only burdensome activities from citizens but as a reasonable source of financial saving and that way a possibility to lower taxes. The reason for this assumption is simple and not easy to refute: if the "burocracy" carries out tasks that are unnecessary and applies rules that are only a hindrance to individual progress to get rid of them means less public servant to pay and more time for work and/or leisure.
However, the situation is maybe not so simple. Continental states and societies are usually different from Anglo-Saxon ones, they usually try to presume every possible situation and circumstances in advance, provide a law and/or regulative framework that can easily be applied by state administration, instead of bringing tha situations not covered by the law to the court in order to create a precedent. In this sense the state administration - I mean it at this point in a broad sense, including local authorities etc. - has the right and responsibility to apply the rules for almost every imaginable situation in a community. It is not simply an administrative machinery, but it takes the burden of acting pre-emptively in order to avoid conflicts or resolve them as first instance.
It can be argued that these roles could be attributed to the community itself, but this is a real historical tradition in Europe and beyond this fact the societies in ECE spent the 20th century in a constant state of exclusion (a signficinat, albeit changing part of the societies were sidelined and/or violently excluded from their rights), in which they hardly could have collected enough experience of cooperation instead of conflict. (Or expereinces to create their own, local regulative framework while taking into consideration every legitimate local interest.) Unfortunately this hole in the social experience was not filled after the change of regime, but sometimes even widened. Anyway, the logical conclusion would be to ask: if the state is eliminated as it is argued, who will take and with what means these tasks, that are integral parts of society? Even if local administration and its rules seems irreasonable, many of the regulations really avoid conflicts, for example the procedure of giving permissions for construction. If the state wouldn't have the right to decide these issues (for example whether one can build a house one-two-three-four etc. meters from the border if his estate or not) it is not impossible that in too many cases the issue would turn into a constant quarrel between neighbors, with equal or even higher costs, but this time without any hope for solving it. It does not necessarily mean that every prerogative and task of the state administration is useful from this perspective, but before deciding the elimination of any of those a thorough analysis from this aspect would be necessary as well. Without knowing what tasks can be easily taken over by the society and which one causes a danger of replacing regulated life with irresolvable conflict or simply anarchy is a real issue, not to be neglected.
Another aspect of the process of natural selection of unnecessary tasks. Guesses regarding the number of public servants to be laid off are usually based on the assumption that the state not only assumes a series of tasks, but in fact fulfills it. As a consequence it is presumed that if an unnecessary administrative task is identified and eliminated the personnel responsible for carrying it out can also be eliminated from the system. But there is a series of administrative fields where the "burocracy" nominally has rights to act and responsibility but due to a mutual adaptation process of the citizens and the authorities, nobody really excerises them. For example although modifying a small roof over the door of a house needs official permission and an approved plan, it is rarerly applied for and rarely required by the authorities himself. Not to speak of the possible general shortage of qualified public servants in a series of fields, where this state of affairs in itself could lead to neglectment of administrative duties. Anyway, it is possible that the state only nominally claims a series of roles and rights but the administration never really uses it and therefore the existence of these tasks in itself is not a sign of a surplus of burocratic personnel. It is also possible that after eliminating these tasks it would turn out that the existing personnel is barely capable to deal with the remaining ones and therefore it is not a source of saving, but simply an adjustment to the realities.
I have no idea to what extent these phenomena exist today in Hungary. But I'm sure that they are in fact realities and therefore without assessing their importance and extent it is hard to plan a meaningful restructuring of burocracy and burocratic responsibility.

Random thoughts at the end of a long year

I have to admit I faced a much easier task at the beginning of the year, when the events of the crisis were dominant in the public sphere and easily bound to a coherent narrative. With the pressure - at least seemingly - lowering on a series of countries the picture became more distorted, while some states earlier seen as almost doomed now are considered as almost exempt from the consequences and new countries joined the group of economies in a concerning state. Most notably Greece and Spain. However, Hungary, Latvia, Romania are still considered as basket cases. And some surprises at the end of the year are worth to pay attention to.

The Constitutional Court in Latvia ruled that a core element of the austerity measures of the government trying to meet the demands of the EU and IMF, the cut in the existing pensions is void. Moreover, it has to be repaid until 2015. Although politicians reacted with disappointment, the prime minister even stating that the country would simply go bankrupt if the authorities obey every legal provision, the issues goes in a sense to the heart of every so-called economic and social reform from the last few years. The Western model of state is based - at least nominally - on the rule of law, providing the society with a stability of rights and obligations. The CC in Riga simply decided that pension expectations - anchored by law - are such obligations of the state that can reasonably be expected to be fulfilled by the state. The rule of law idea has been chosen as a pillar of democratic society with a good reason and historically its neglectment led to very severe consequences. This time the government will also try to comply, but there is an inherent contradiction between the preconditions of the agreed loan and the constitutionality of these measures. The economic policy implied by the agreement is thought to be the optimal way to deal with the crisis, but the legal provisions - and sometimes the lack of political support and will - are an objection on this road. However, after mass-scale experiences with a system in which every aspect of life was submitted to the perceived needs of the economy and at the same time economy was considered as the area of society that determines everything else it is hard not to feel reservations. And now, after the collapse of the above mentioned system, we are in an era where exactly the same is happening, this time invoking democracy. (OK, socialist systems also perceived themselves as democratic ones.) The earlier experiences didn't really confirm that submitting the society to economy is a good idea, without reservations.
It is clear that rule of law, especially in times of rapid changes not necessarily equals sustainability of a society and the rules sometimes have to be accomodated to the changing environment. But the ruling could remind everyone that so-called reforms, however bright those ideas seem, need democratic legitimacy and popular support, otherwise, only acting in the name of some kind of rationality they can led to surprising consequences. (Not to speak of how irritating can be the view of technocrats praising measures that diminish the standard of living of everyone but them.)
Otherwise the ruling could raise another important - and for the time being clearly neglected issue, the distribution of the burdens of the crisis and the coming period of adjustment. Especially as two quite contradictory views confront in this regard. The dominant perspective - at least in ECE - sees elderly, inactive people only as burden on the shoulders of the active members of the society and this way justifies the confinement of their social benefits to a minimal level. But the crisis was mainly caused by the excess borrowing and consumption of the active groups of the societies, they were the front runners of consuming beyond possibilities. (At least I presume that more active people got FX loans than pensioners.) And the cut in social benefits - especially with a determination to save those loans from effective default - is nothing else then putting a burden on those who were less responsible for what happened and who would have a chance to regain some of their losses during their remaining active life, while pensioners can not really hope for recovering their losses. One can argue that governments has a very limited room for maneuver and it is true as a general assumption. But especially in cases of low redistribution systems the pose - taken by governments - of the guardians of the (would-be) middle class interests is rather a defence of the interests of the very wealthy, whose income and property is untouchable, at least it taxation is an anathema with the reasoning that it would reduce entrepreneurial incentives. It is maybe the case, but even in this case some moral principles could be taken into consideration. But as long as we have very few data on the disposition of the wealth of those at the upper end of the income scale it is a mistake to presume unconditionally that they invest every additional cent and every piece of their existing property in productive enterprises. Why? Didn't they invested in real estate funds, hedge funds, specific financial products linked to exotic financial indices and derivatives etc.? Would it be more reasonable to think that instead the wealthy - who were always proud how sophisticatedly they manage their wealth compared to the ordinary (“kádárist) people- the pensioners fueled those financial enterprises?

It would be easy to think - and one must admit it is also quite popular - that this greed of some individuals was the structural reason behind the crisis, but scrutinizing the situation more closely one should conclude that unfortunately we are all behind this situation and not only because taking loans irresponsibly was a widespread phenomenon. Moreover, this issue is also connected to the problem that in this crisis companies are less ready to absorb losses with reduction of profit. In an ideal and traditional world of capitalism, characterized by family enterprises of many generations the company is the property of a few people who occasionally can decide to take losses for a certain period and reduce profit. It doesn't necessarily mean that they would do it, but they certainly has a choice, at least as far as they can fulfill their financial obligations to lenders and to the state. From a different angle it means that even though profit is still the main driver of enterprise it is easier to resist immediate action for preserving profitability in times of hardship. But this world of the Buddenbrocks or Morels is in principo less biased towards immediate layoffs than the present, where very an ever growing number of companies has more and more nominal proprietors as shareholders while in fact the management make decisions, the only expectation is to provide shareholders with higher and higher profit. Moreover, the personal income of managers is bound to profit rates, but profit is more and more the result of the rising price of the company's share instead of production. Anyway, it is a logical decision to concentrate on keeping profitability high even in times of crisis and the only means is to cut back production costs as much as they could be aiming at a relatively high profit ratio.
It would be easy to assume that this is still a game that is advantageous only for a small minority of a society, but as social security and services (most notably pension systems and health care) became gradually - and sometimes only partially - privatized the high profit rates are in the interest of everyone who has social insurance as well. As soon as company profitability collapse more people would be hit than one would initially assume, just because pension funds invest in financial products either directly into company shares, or indirectly. In this system social redistribution rate is lower, instead of taxation long term profit yields personal security and stable living environment. But it makes people increasingly dependent on the success of financial companies, maybe exactly because only high profit rates that can only be achieved on these markets can compete with effective redistribution - at least as long as demography do not intervene.
Beyond these considerations there is the problem of financing companies' production. Once again in the traditional and ideal world it is based on direct credit links to banks (many of them also private companies, properties of a limited number of individuals), while modern finance brought about a huge change. Direct financing from the market - issuance of shares, bonds etc. - became more popular. However, this reorientation not only meant an easier access to savings, but a profound change of the traditional way of financing the economy. (Once again in an ideal world.) Savings placed on accounts at banks, borrowed by companies thoroughly scrutinized by those financial institutions and re-payed with a modest return on capital, resulting an equally modest percentage of income on for the initial savers. The increasing importance of the direct financing from the market offered higher profit for individual investors, while production itself lagged behind returns of investment in financial assets. Savings were distracted towards financial markets in a growing proportion, quite logically.

This issue also leads to the problem of sovereign debt and sovereign default, because the privatized systems - although with certain restrictions - channels the savings from the state bonds to other financial products in order to gain more profit, compared to the low return on government bonds. Nowadays sovereign default is considered as a horrific perspective - one of the bigest issues of 2010 - although there were more complete or partial one in the histroy than one would except and the consequences - if it happened in a regulated way - were not always catastrophic. Just to mention a recent example from ECE: Poland defaulted on its external debt and it lasted fro years to achieve an agreement with its creditors but at the end it didn't hampered its development after the change of regime, Romania instead payed back almost literally every cent in the '80s with serious social consequences, Hungary tried to manage its debt for almost three decades with more or less success, but today one of the most important limitations on its economy is the sovereign debt. (And yes, even the US defaulted in fact on some of its debt during the Great Crisis, but as it was well managed it was not a very spectacular event.) However, sovereign default, if it is not well prepared and managed, a very unpleasant event, therefore governments were moe inclined to use inflation for effectively reduce outstanding debt in the past. It also gave a chance o place some of the burdens on the lenders, as inflation hurted them as well. However, with the strengthened independence of central banks and the limitations on direct issuance of money it is more complicated today, even if a country is capable to borrow in its own currency. Markets are too alert to inflation risks and as soon as they suspect it the price of issuing government bonds can easily rise.
But one of the causes of the crisis is the existence of excess liquidity in the world and up to this moment central banks, financial authorities and governments were only successful in replacing it but not effectively reducing it. As long as this excess liquidity remains it is hard to imagine a really stable and sustainable financial system. One way to reduce it is nothing else then write off even in the form of sovereign default. Or more precisely regulated write-off is the alternative of sudden and unexpected sovereign default.

But not only reduction of liquidity would be necessary to really stabilize - and not only repeat the earlier cycle - the world economy, we need stable state finances as well. Sovereign default s looming over our head because state finances proved to be very fragile and facing the crisis almost none of the important economies had reserves to spend. Instead government debt amount and ratio to GDP soared. The usual recipe for this state of affairs is cuts in budget spendings and tax cuts in order to reignite growth. However, exactly the story of the last one or two decades shows that the usual mixture of tax cuts - spending cuts and reforms were not capable to ensure fiscal stability, they even became a factor in the instability after the unheard fiscal stimuli. Just look at Germany, where politicians try to keep electoral promises in forms of huge tax cuts, but sovereign debt is predicted to skyrocket in the next few years. The usual mixture is never really aimed to build up reserves, but to keep the state finances on the edge of managebility, due to popular and business pressure for more and more tax cuts. Maybe it would be more reasonable to modify this approach, as the last few years, with a series of significant tax cuts in Europe riding with the tide of the credit bubble created growth hardly can prove that lower taxes will necessarily result in an upswing of revenues later. Especially as consumption is far from recovering and the environment is hardly promising for investing in production.

The ideas and reasoning above is clearly not all-encompassing and it is only designed to deal with such aspects of the problems that are usually not in the forefront of the discussions. It is not claiming to be universal and sole solution, it's aim is only to highlight that these problems are interconnected with other issues, equally significant for a society. However, one conclusion is clear: democratic societies shall take into consideration these aspects as well and democratic decisions, upkeeping individual and collective freedom can only be made with regards to these besides the sole economic factors. Nevertheless, in a crisis it is hardly the task to distribute surpluses and gains, it is all about distributing the pain. In a righteous way.

Wednesday, December 9, 2009

Shameful self-promotion

Just a link for those who can read French. The topic is quite fitting, although the story of this piece is still a bit strange for me.
Lost in Transition?
Here is the pdf version.

Sunday, December 6, 2009

Lost in Space and Time

Decisive second round of presidential elections in Romania. Some TV stations has an all-day program covering the events - funny and sad, comical and tragic - with the indispensable talking heads, intellectuals analyzing. An economist - former minister of finance -, a historian - former minister of foreign affairs, - and a political scientist - not a former minister at all - shares their views on Romania. The country is seriously and dangerously divided, as the unexpectedly succesful mobilization shows. The political debate in the capmpaign was on superficial issues instead of programs. The Romanians are dependent on the state. Romania is situated as the last country in the EU in every respect. The governments of the last few years were irresponsible. The country is seen as similar to the Ukrain. (!) As if I would be in Hungary. Maybe some of the Hungarian intellectuals has lrearned Romanian and asked to participate in Romanian TV programs? I don't think so, it would be ruinous to they conviction that Hungary is alone as the only divided country with a population hoping for help from the state, with superficial debates, irresponsible governments and at the bottom of the EU.

Friday, November 27, 2009

The New Europe

The list of (probable) European commissaries was reveaeled today and it gave opportunity for some reflections here in ECE, as usual. Some surprise is justified, after even the Romanian press reporteda month ago that the country won't get the agricultural portfolio they dreamed of and at the end Dacian Ciolos landed there. But the perception of the position of commissar and the respectove positions accorded to the candidates are quite typical in a sense.
The common elemet is the scizophrenic acceptance of the assumption that the EU commissary is not a representative of his or her country but the Union and its people. However, it is hard to miss that the reactions almways convey - at least implicitly - that this will be "our" portfolio with our representative there. But it is probably quite common everywhere. It is more interesting to see the differences, for example between Hungary and Romany. The Hungarian press approaches the position - sociall affairs and labour - primarily as a question of money and influence. The sum allocated to the portfolio, the importance of the field in terms of euro billions and share from the EU budget are the main concerns. In Romania - although the agriculture is clearly an important field in terms of finances - the focus lies on national pride. Romania came out of irrelevance, achieved a diplomatic victory and will have an important position. (Although not, as it is also mentioned in these articles and discourses.) It is a recognition of the country and the success of Romanian knowledge and expertise. So, Hungarians see a great bag of money where Romanians see an examination committee - in Europe.

Tuesday, November 24, 2009

Prudent politician vs. Hungarian madness

One of the most typical accusation to the adress of the Hungarian politicains from the business elite that the political elite simply bargains long term advantages fro short term political ones. (The most recent one comes from the prime minister, Gordon Bajnai, who is not really a politician, but one of the experts - with current finance mininster, Péter Oszkó, who arrived with great plans into politics and administration and clearly had to realize that in the public administration best practices from business can be even outright failure...) This statment is usually supported by an argumentation, pointing out that other ECE political elites could have managed their countries better and were more focused on the long term. Well, after a deputy whip of the largest Polish government party told in an interview to Bloomber that his party is not ready to commit political suicide and make budget cuts until the elections in 2011 I think this refine construct could be forgotten. Ukraine is a complet mess, because politicians are not willing to committ the same suicie, Romania similarly, in Serbia - another recent candidate for overtaking Hungary in the self-flagellant and nationalist discourse - the number of pensioners is estimated to be higher at the end of the year as those working (a fact advertised by the largest and most professional Hungarian economic website, as the only case in the region, even though it was already the case in Romania two or three years ago, although to admit it would have meant an abandonment of the idea of the Romanian miracle due to flat tax), and this series could be much longer. It is again a small but clear sign how self-focusing and how detached from realities can this supposedly expert thinking be...

(Oh, and it is not excluded that at the end Germany will experience something similar to Hungary's fate in the 2000s. The liberals in the new coalition are very insistent on their promised tax cuts - the justification is the same: lower taxes mean more employees and more income - while their partner(s) in this "natural" alliance are fighting against their ideas - not only against their proposed tax cuts and the realization of it, but privatization in the health insurance system etc. The conflict is clear and at least superficially not dissimilar to the internal conflict of the Gyurcsány-government in Hungary. Moreover, the tax cuts are a textbook example of redistribution from down to the middle and upper income categories. In the lower segment of income it will be offset by growing costs of public services - litter transportation, contribution to the costs of health care etc. That makes it an illusion or at least a dubious attempt - especially in ECE with relatively low income levels - that tax cuts will bring more purchase power, more demand for local services, consumption goods etc. As long as it had to be offset by spending cuts it will automatically lead to higher cost of public services and in case of low income levels this raise of expenditures will suck up the additional income. While those with a really high income won't really spend more on hair cuts as their hair won't grow faster due to more money....)

Thursday, November 19, 2009

Relief and self-congratulation

Hungary is certainly not a peaceful country nowadays, but the growing tensions – albeit connected to the crisis and social poverty – are never directly associated with the financial and economic crisis. Regarding this issue a cautious stance prevails, emphasizing more and more positive effects of the governments measures. The parties behind it seem to accept their fate with resignation, and some of their politicians are ready to think that the cure prescribed by the „experts”, the business elite and the IMF – this at last showed some muscle recently in Romania and in the Ukraine (although only after prolonged period of a total lack of compliance in the former and a skillful tactics of „promise-and-non-fulfillment” in the other) is bringing its first fruits. (Even if it would be the case why are the same fruits sweet for supposedly leftist politicians as for not just supposedly rightist businessmen?) Anyway, the prime minister and the finance minister gave a series of interviews recently confirming that the budget deficit will remain as agreed with the IMF-EU couple and the fiscal restriction has its first effects: Hungary will emerge from this Maelstroem as the most competitive country in ECE.
Faithful readers can be already familiar with my views on this very simplistic and deadly perception of the world – I rarely felt myself better as an underpaid academic knowing that meanwhile I'm living in a very competitive county. The whole idea of competition instead of cooperation in ECE is one of the reasons of the mess we are experiencing. The clear demands and preferences of the society – usually expressed by vote – were always neglected in the name of competivity, as disadvantageous for business etc. and of course as remnants of some dangerous post-socialist, post-communist mindset, incompatible with democracy and capitalism. This stance even reached such heights as to accept lying to the electorate if it serves the aims of the business elite (and middle-class) but despising it if it turned out that the lies veiled a somewhat different, socially more balanced politics.
(One must admit that nowadays a different approach is gaining strength, the one arguing that the failure of transformation – that is in a sense an exaggeration – was caused by social pschychological factors and the mentality. This would be the real hindrance before the implementation of reforms. However, the proposed solution is not to develop ideas fitting to the social realities, rather somehow transform the mentality in order to implement the reforms, that are perceived as having no alternatives.)
Returning to the topic of this post, the government certainly can cite analysts predicting that Hungary will be the most competitive, most fabulous country. (On the one hand it is really comforting, at least no country will be at the end spared of the pains. :) ) But I fear analysts once again won't register success with their predictions, as they didn't before the crisis and since then. (A series of important data appeared in the last two weeks, for example GDP growth rates, and analyst's consensus was usually far from the real data. In case of Hungary they were disappointed but once again nobody asked whether their profession has any relevance, whether they deserve the attention paid to them. If analysts has something wrong, it is always the government's, the politics' the kádárist's fault and not theirs.) The real problem is that these forecasts are based on the usual simplistic model, somehow calculating a potential GDP growth (that is a very slippery issue, the oracle from Delphoi could be almost as successful as analysts, as the future is not known for anybody...). In this case they rely on the assumption – at least as I understand – that lower taxes are an incentive to hire workers, because cheaper labour makes producer prices more competitive and it will lead automatically to a higher employment rate. (What they will produce and first of all who will buy it, it is not a question. As in case of some economists, who – arguing that the lasting problems of labour market participation in Hungary needs a systemic approach instead of the present fragmented one, based on different education programs and state subsidies – came up with the all-encompassing and very systemic solution: in crisis regions a lower minimal wage have to be agreed upon.)
Nevertheless, this issue – what to produce and for whom – would be crucial as export based industry in Hungary was quite competitive even in the recent years (although the effects of the crisis are not clear at the moment), but for example a 5 point cut of the social contributions from July didn't had significant effects on employment, business was not capable to hire workers just for the sake of paying lower labour cost, the unemployment rate was kept at bay only by state-financed public work programs. Maybe next years similar cuts will have a different effect, maybe growing export markets will contribute to the easing of the situation. However, it has its clear limits as well.
Unfortunately the core of the problem lies in the SME-s, oriented towards domestic consumers in services, retail sales, construction. Although lower taxes would seemingly be good for them as well, not only due to lower labor costs (although paying less for some employees not necessarily enough to hire a new one, especially if there is no demand for the products), but through higher net income of the population. But the competivity issue in the export oriented sectors is a hindrance of wage raises as well, making the effects of tax cuts limited. Another possible solution would be redistribution to those whose “marginal propensity to consume” is higher – i.e. who are poor and can not afford even the basic needs on a daily basis – but it is also despised, as not business friendly. For a while credit substituted for real growth of income, but the result is too painfully clear. Without significantly higher wages there won't be really higher demand for services and construction. Moreover, lower taxes usually mean fewer public services or more expensive ones. Effects of tax cuts on personal incomes – especially in a country with lower wages – can be almost entirely offset by higher costs of public services. But not much SME-s will be content, when people will spend their excess money on train tickets instead of a hair cut. It would again flow to the state and not to the companies.
But the simplistic “lower taxes bring higher employment” assumption's validity is doubtful because of other reasons. The immobility, low education, low skills of the workforce reserve (the employment rate was 58% at its best now it is around 55%, the reserve is guessed sometimes at about 1 million people) would make investment necessary. Investment in mobility – affordable housing, not rents as high as a monthly wage, reasonably priced or state supported traffic costs etc., (the company's contribution to public traffic costs of their employees will become a taxable income from 1 January) – and in education would be much needed, but for this aim also redistribution would be much needed. At least as long as offering chances for everyone is perceived as necessary social solidarity and means of cohesion. If not ..., yes, it is another country.
(Moreover, there is a fair chance that at the end, with a rapidly ageing population and dependency ratio, without a European social system, Hungary will end up as having only one chance, to export more and more, making this whole speculation on possible ways out pointless. But even in this case the state would have to invest in children.)
Therefore the self-congratulating manner, the dreams of being once again a forerunner country seem not too well-founded. The result could easily be disappointment of the middle-class seeing that the price of tax cuts is higher payment for public services and freezed gross wages for a long period, therefore lower taxes bring not more money to spend on consumption, the disappointment of the SME-s because of the continuing lack of purchasing power, and even stronger disappointment of the poor, for whom it easily could mean more poverty and less chances to get out from their situation. The already very serious tensions can easily explode at that moment...

Tuesday, November 10, 2009

The typical ECE blindness - Hungary, an "oasis of stability", according to a Romanian business newspaper.

It is really hard not to laugh loudly or weep equally strongly. Ziarul Financiar published an article on Hungary,praising the efforts of the government and even stating that now the country is the most stable in the region. The article is a kind of exemplary of almost everything I have complained at these pages: wishful thinking, promotion of particular interests camouflaged as general ones, posing as well-informed even if it is clear that there was no real inquiry about the facts and the use of non-existent examples from the not-so-beloved neighbours in internal fights.
At the moment Romania is in a political chaos (for foreigners with a modest and secure income it is just a tolerable place), and the business elite proposes solutions putting the whole burden of the crisis on the population, especially on the lower social groups, not accepting any kind of personal loss, moreover even striving for personal gains in the form of further tax cuts. As something similar happened in Hungary in the last few months it is an obvious choice for giving examples and that way the exaggeration - the most stable country etc. - is comprehensible. But there is almost nothing to support this claim, besides statements from the Hungarian government, what is a dubious proof anyway. (Which government facing financial hardships would eagerly admit that their efforts brought moderate results and the seemingly better situation compared to the one a year ago is more a result of the growing risk appetite of the "very efficient" markets than that of thier own efforts.) Moreover, even the mesures listed in the article as the causes of this sudden but well deserved change in Hungary's situation has not too much foundation. The Bajnai government is far from being a technocrat one (the Ziarul Financira obviously portrays it that way because the president, Basescu proposed a prime minister from the Romanian National Bank and this designated premier suggested that his government would have been a technocratic one...), the corporate taxes were not lowered, but slightly hiked. On the other hand a series of measures, however welcome by the Romanian business elite they would be, were not hepling the fiscal stabilization and even the claims attached to them and mentioned in the article - for example lower social contributions will help employers to keep their workforce - did not visibly brought the suggested result (look at the growing unemploymetn in Hungary that is only counterbalanced by government financed public work programs, and not the supposed positive effects of lower labor costs). Unfortunately, what Ziarul Financiar presents as an example to follow, a very desirable set of measures, even in the presented form, is nothing else then a receipe for making social divisions deeper, differences larger, redistributing welth from the botom to the top of the society.
And even the typical ECE negligence is not lacking from the text. Although Bucharest is not far from Budapest and ZF would be certainly capable to send somenone there and who could make a thorough eamination of the situation, hear different opinions etc., they rely on a short note of Bank of America Merril Lynch describing Hungary as the inevitable forerunner of the region! That's the part that makes me weep and laough simultaneously... That kind of pompous and carless behavior! What some guys far away say about a country after putting some basic data in their models is worth more attention, is a more thorough knowledge of the situation than the one someone from there, with some work could have synthetized. (Just beacuse these guys are sitting somewhere in the West in an office building? or because this case, exactly because of the lack of information an be portrayed as a desirable soultion - at least for a certain social group - for the problems at home?) Welcome to ECE...

(Well, shall I explicitly note that the respective article was already taken over by some Hungarian websites?)

Monday, November 9, 2009

Revival - shallow thoughts and campaign unleashed

I mean maybe this blog will revive. I'm not proud of neglecting it - although not deliberately - but sometimes there is no time, or if there is still some, than energy lacks. Anyway I made promises that remained unfulfilled, however, I didn't really find suitable topics to deal with as I was not convinced that apart banalities I could be able to express anything half-original. And only repeating what others already explained - I would spare myself from this kind of self-promotion.
Nevertheless, at the moment I'm in the middle of a savage electoral capmaign, the prize is the seat of the president of Romania, among the contenders we can find Mr. Basescu, whose economic talent was many times highligted at these pages, the president of a the so-called social democratic party, Mircea Geoana, a liberal candidate, Crin Antonescu, the eternal challanger, Vadim Tudor, the extreme nationalist, a literate Hungarian, a poet, Hunor Kelemen. The first three are the serious candidates, the others can influence the result but has no real chance to become head of state. Not that it would be a welcome job, I suspect. Romania, even half a year ago portrayed in Hungary as a rapidly emerging country that will overtake its western neigbor in three or four years, is now on the verge of collapse. Not only had the budget deficit soared - it is predicted to reach 8% of the GDP - and the economy declined, but at the moment the favorite theme of politicians is the lack of the necessary revenues to pay public officials, teachers, justices, nurses, medical doctors etc. The IMF delayed the next part of its credit until a new and stable government will be established.
One reason beind is the campaign itself. I'm even not convinced that the situation is really so dire as it is portrayed, because politicians are clearly seeking the way to put the responsibility for the failure on their rivals. Therefor everyone maneouvers, tries to snooker its opponent(s) and somehow convey the image that if the salaries for next month really won't be paid out it will be their opponent's fault somehow. And as the president - whose party was left alone a month ago by the social democrats as sole government party - can not easily distance himself from the problems, he clearly tried to frame the situation as if only the IMF money would be available for the state. And the objection of the social emocrats to install a knew - minority - government of the presidents party is the only objection in the wy ofn this part of the credit.(It is evidently cheaper, but the Romanian government borrowed continously in this year from local banks huge sums and with a growing risk apettite at the markets even the doubious CCC credit rating wont easily deter "investors" from buying Romanian government bonds.)
But this is only a minor aspect of the crisis and I fear none of the candidates - and no one from the economic elite - is ready to drew the very sober conclusions from the crisis: the model of the recent years at last failed to delver a sustainable growth and it is not easy to imagine that it will in the future. However, every proposal is somehow a repetition of this earlier economic policy. (The social democrats try to mix it with some populist measures, higher salaries, lower prices fro public services etc.) Romania, a realtively poor country with a huge population depending on social assistance due to the lack of employment lived primarily on the remittances of a large guest worker population (at its peak they sent almost 10 billion euros to home in a year) and made it easier for its population to take credit with the help of lower tax rates. (Nevertheless, Romania's tax system was neither simple, nor really low, but the rational and efficient and etc. markets and their even more rational and efficient actors was simply not capable to grasp it, because they only had some very superficial informations...) Although the country attracted some investment, a large part of it went to the real estate sector and real estate prices skyroceted. Just as consumption with them. (Bucharest is quite similar to Latvia in the outlok of its cars and it is striking how many prestigious companies have a shop somewhere in the city. For example Cristophle closed its shop in Budapest after a year, while the Bucharest branch still exists...)
Anyway, it stopped with the crisis, and now people began to feel the harder times. The proposals for reviving the economy do not seem to be far reaching enough: austerity, cutting of social spending (it is usually called better targeting but please, don't tell me, that someone with 200 euros in a month as regular income not deserves some social assistance...) and cutting jobs in the public sector. The latter can be reasonable but the country was never really capable to create jobs, the record low unemployment was simply a result of the emigration. Now the migrants are returning and public officials will be laid out... The problem, unfortunately is the poverty that do not allow domestic consumption to be the driving force of growth. Even not with tax cuts - a liberal proposal - when they would deliver people 20-30-40 euros per month. (This is one of the weakest points of every tax cut ideas in ECE: with a realtively low wage level local SMEs orieted towards the domestic consumers can not raise their prices for services too much. People simply do not have enough money to pay 15 euros for a hair cut after spending the lions share of their income on houshold costs and food.) But the perspectives are not bright, with a rapidly shrinking and ageing population and with the necessity to export more... Romania faces either a very long and protracted struggle alone, offering low wages in order to attract investment in export oriented sector or ... don't really know. With the strain of the crisis slowly withdrawn the chances of a profound change - a turn from a state level regulatory and social system combined with supranational free market towards a supranational level regulatory and social system combined with supranational free markets - seems less and les probable. The aging and poor ECE countries will remain entrapped.
Otherwise the non-political proposals are sometimes even worse. "Economists" analyzing the region from a macro perspective - I'm still stounded seeing how easily they preceive that they are omniscient after putting some basic data in their models - can not really tell what would be the way out. The language and discourse of these actors is shallow and contentless, full of empty signifiers and not a single world with real content. They simply repeat phrases, like structural reforms, tax reforms but at the moment they even not dare to give details. Just phrases. And it is always hard to get rid of the feeling that it is completely immoral: to make such unelaborate proposals (while only onething is certain: in essence they mean the worsening of the situation of the social groups at the bottom of the society) from well-paid positions... Even if it is demagoguery, I can't help to think of it.

Wednesday, October 21, 2009

Casino Royal? Reminiscenses of my childhood

This blog tends to be quite boring, I must apologize again, but instead of the announced posts on Romania or Germany (later, later...) I felt an inspiration to share my views on another funny personality from Hungary. The pretext to focus on his deeds is an announcment from last week that his construction company will establish a huge complex near Pratislava/Pozsony with hotels, a casino, a spa etc. The plan is grandoman one, although not without precedents, Hungary was somehow a favorite location - at least tehoretically, as no plans were realized yet - for companies to build a European Las Vegas. One of these attempts is under investigation after the company was accused to manipulate with the swap of territory with the state, another one is allegedly on its way to realization, suprisingly quite close to the place where this new complex is planned. Anyway, casino and the turist flow awaited from such an enterprise seems to be an object of desire for many entrepreneurs. In this case 1,5 billion euro is the invested amount.
It is strange to see the extent of reverence this businessman is treated. As if he would be a genius. This time the announcment was covered with a badly hidden feeling of disappointment and loss, with sour remarks to the Hungaian burocracy and environmental movements because they are blocking the realization of similar plans in Hungary, without any doubts regading its use or viability. If Demján embarks on this project it should be a kind of Eldorado, imply these recations. Not to speak of an alleged 30000 new employee and a 5% rise in Sovak GDP. Obviously, it was also unavoidable to read some sentences on the superiority of the Slovak tax system and state policies, especially as the manager of the planned construction works emphasized this factor behind their decision.
This small and in itself not really significant story is a very good illustration of the lack of critical approach and a servient and self-submissive stance in the public. Demján is treated as an economc genius, Slovakia is the object of our desires and every statement of a construction company - clearly biased - is accepted at face value. The general mood resembled a disaster. (The ironical side of the story is that one of the newspapers, Népszabadság, a couple of days later published a report from Bratislava/Pozsony infroming the public of the doubts raised in Slovakia itself...)
However, Demján was never an economic genius, at least not in the sense being a good economist. Hew grew influential as a manager of a state run chain of deprment stores and later he represented a Canadian businessman from the field of construction, Peter Munk. (Maybe the company usually described as his is still owned by Munk...) It is hard to escape the impression that he never has risked his money and got rich using someone else's. But it is simple jelousy, I wont deny. The real paradox of the story that Demján for some years advocates a strange economic policy for Hungary. (As he is accepted without doubts as an economic oracle he had a lot of opportunity to explain it...) To get rid of every "non-productive" sector and focus - i.e. support it with every possible means, subsidies, tax cuts etc. - on industry! And no one ever asked Demján why is he building instead of producing? Why is he inclined to establish a casino when he could have establish a factory? No one ever became curious of this strange contradiction. Apart from the reality and the reasonability of such proposals it recalled a very old - and as I believed outdated - notion of (vulgar)marxist concept: the comprador bourgeoisie. A social group subordianting everything to the interests of foreign capitalists and making gains as the representatives of it...

Tuesday, October 20, 2009


I'm terribly sorry for having neglected my blog and therefore my readers as well, those who just stumbled upon it with a carelessly chosen phrase typed into Google and those who were returning regularly. Unfortunately I'm amidst of moving from Budapest to Bucharest for five months (more precisely: I have four and a half months left) and it consumed a lot of energy and time. I could also defend myself referring to the ever growing optimism in the world, hopes of a solid and sustained recovery flourishing everywhere making thoughts of crisis obsolete, but it wouldn't be honest. I was lazy and I can only promise resuming blogging in the nearest future. Maybe this unintended break will turn out to be useful as I was planning to write about German elections, but it would be even more interesting to include the results of the coalition negotiations. Of course there will be something on the political manouevering in Romania as well.

Thursday, September 24, 2009

In the Race Again - Notes on exceptionalism VII.

The Hungarian prime minister, Gordon Bajnai visited the United States, more accurately participated at the UN general assembly and used this opportunity for a longer visit, with a lecture given at Columbia University, a talk with Hungarians from New York and not the least fro a meeting with "business circles". He not only expressed his pride over his government's efforts and achievements (making its homework, it was the phrase he used) but stressed his conviction that Hungary will soon become again the front-runner of ECE in the never ending competition of its states.
Those few who followed this blog are already familiar with my opinion on this assumption and won't be astonished if I would again emphasize how dangerous this perception was, how disastrous effects it had on the societies of the transition countries. But - even though I should admit it wouldn't be entirely fair to criticize Bajnai's attempt outside the context of the need of attract foreign investment to Hungary in an environment where almost everybody forecasts a significant reduction of the capital in the world - it is hard to evade further comment of the whole concept of competition. Originally competition is inherent element of a market economy, but not the competition of entities like states, only individual ones, companies and individuals offering their labour or ideas. Competition is easy to perceive at this level and easy to connect to ideas like fairness, freedom etc. But to extend this idea to states is not so simple as the frequent use of this phrase in connection with ECE countries would suggest.
The starting point is already dubious: is competition between countries - in the sense as it is applied to markets - really exist? One can easily imagine the individual level of such competition, companies, farmers, workers acting in the framwork of a single market, consisting more than one countries, something like the European Union. But what is the place and role of the states in this structure? Can they compete similarly? Especially as this competition is never imagined as a substitute for the competition of economic actors, rather a complementary of it. States are usually seen as societies, more than a sum of the economic actors belonging to them. But as societies they are supposed to act in order to achieve a kind of equilibrium between different aims and interests, conceived as common good. While states are perceived as competing each other - in the sense Bajnai referred to this concept - only one element - however important it could be - brought to the fore: the economy. And even within the economy only a part of the actors are in fact in a competitive situation with their peers from other countries. It is easy, too easy without critically reflecting to the concept of competition between states, to elevate or transform partial interests of some economic actors into common good. Competing with other states on he field of economy can result in the neglectment of other sectors of the state's responsibility, the society, as those are not in a direct competition and therefore this concept can not integrate their needs. But as the interests of economic competitors is envisaged as the ultimate interest of the society - it can distort the original concept of common good.
Maybe economic growth in itself is raising and extending public good, welfare etc. But it is not a certainty, especially when the market, where competition is taking place, is broader than a single state and a single society. (And the Pareto-effectivness and equilibrium is hard to apply to such a blurred entity as a market economy that is not a society etc.) Not to speak of the experience of the last two decades, when rapid growth was not Pareto-effective as regional differences were growing not only in relative terms, but in absolute terms as well. A series of regions in ECE are now poorer than they were in 1989 (and they situation didn't improve during periods of steady growth), even if a small number of regions are much wealthier. The latter are usually regions in competition and the former are simply excluded from the market mechanisms. But it suggest that once again entering the race is nothing else than sacrifice these parts of a country for the sake of te prosperous ones. As it is quite consistent with lowering redistribution rates.

Saturday, September 19, 2009

Groupism in practice

I must apologize in advance for being again narrow-minded and concentrating on issues seemingly of secondary importance, only very superficially connected to the crisis. But the abandonment of the US missile shield project in ECE caused some reactions that are great illustrations of a concept introduced into the nationalism studies recently and not the least can shed light to the thinking of ECE elites or at least a part of them.
The issue is quite simple, the Obama administration announced the abandonment of the plan of a missile shield with a radar station in the Czech Republic and ten missiles in Poland with the aim to intercept IBMs launched from Iran. The plan caused much tension between Russia and the US (and its allies in ECE) because it was perceived as aimed against Russia and - ironically - while the Bush administration never forgot to stress that it is not capable to counterbalance a strategic strike force as large as the Russians have, the Polish and Czech politicians saw in the realization of the project not only a chance to raise their importance in the US system of alliances, but an effective way to deter Russia from aggressive steps against these countries. Not that it would have been really popular, at least in the Czech Republic the plan was widely unpopular.
Anyway, the announcement caused uproar, at least among the elite. Some weeks ago a group of experts, diplomats and politicians, describing themselves as "atlantists" (i.e. personalities with a deep attachment to the idea of a firm alliance between their countries and the US) published a letter supposedly addressed to the Obama administration and warning the consequences of such a possibility, the perceived spread of a feeling among the population that the US surrenders the region to Russia.
Up to this point it is a pretty simple story, one would be justified to ask: what the whole series of events has to do with such unheard concepts as "groupism"? I will spare my readers (however few they are) from a detailed discussion of this concept, invented by Rogers Brubaker. The core of this idea is an observation and critical remark: many categories employed and applied by social scientists implies the very existence of the subjects of their analysis instead of asking for this fact. Social scientists tend to take the existence of such entities as nations, states, societies - all of them as entities acting their uniformly and unanimously on their own behalf - analysing such phenomenons as nations as if they could act as single actors, as their respective elites claim or describe. The idea was a productive one fro the social sciences, but as the reaction to the event mentioned above shows it is far from being universally accepted or applied.
The largest and supposedly best quality newspaper in Hungary (Népszabadság) published a small collection of different articles in order to place the decision of the Obama administration in a broader context. It published an interview with Zbigniew Brzezinski, a small report on a survey carried out by the German Marshall Foundation (Transatlantic Trends 2009) and some auxiliary information on the reactions in Poland and in the Czech Republic.
The whole story is covered as if such entity as Poland, Hungary or any country in ECe would exist and act as a single person. The results of the Transatlantic Trend survey are reported as a sign that contrary to the Western part of the continent Obama's accession to the presidency would have caused disappointment and disillusionment. The paper cites someone responsible for the research stating that the new administration is less popular because of its less confrontational approach to Russia. Surprisingly the survey results show that the Bush administration was less popular even in Poland where anti-Russian sentiment is really a mobilization force. And the other results signal not less, but more enthusiasm towards Obama, although not as strong as in Western Europe.
But this is not groupism, this is simple professional incapacity. Groupism as a basic concept of those whose thoughts are conveyed by the articles is revealed by such phrases like Poland or the Czech Republic is disappointed because of the abandonment of the plan, Eastern and Western Europe is worried by the dependence from Russian natural gas and oil etc. Even though these issues are usually confined to a very narrow group of the respective societies and the missile shield was - especially in the Czech republic - an unpopular issue, only supported by the elites, as long as those elites express their views as if they would represent the public opinion it is accepted s such. And the disappointment of some people in the elite is interpreted as widespread disappointment, sometimes contradicting the evidence. But as long as elites are seen as identical to their respective societies, groupism will prevail. And we will hear that Romania, Hungary, Poland, Slovakia etc. did something or felt somehow, however crazy such an assumption is.

Wednesday, September 16, 2009

With "recovery" exceptionalism and self-flagellation returns

As one can hear more and more positive forecasts and predictions - and the summer recess ended as well - the media is filled again with "analysis". Economists and analysts, politicians and gurus are once again on the scene and pre-crisis narratives are once again sold, without discount. Although this time at least their opposite is on the imaginary shelves...

The self-flagellation, so popular among Hungary's "intellectuals" is back directly or indirectly as well. If a politician of the respective country's makes a statement on the inevitable fast recovery and even faster future growth of Romania, Slovakia, Bulgaria etc. it is immediately bought by the media and distributed, without any comment, contextualization etc. As if the last half a year would have never happened. Nobody seems to be interested in the respective countries beyond a set of basic data, nobody seems to have learned the lessons of debacles. Moreover, a modest, but very visible flow of articles on Slovakia as the country offering the model to follow appeared again, quite in pre-crisis fashion. The past is bright and the future will also be, as they implemented the right economic model. Doubts are not dismissed, they are rather omitted from the picture. One quarter of growth - even though it means quite serious decline on a year-on-year basis and was driven by state spending certainly not sustainable on the long run - was enough for this conclusion. As if nobody would be willing to consider the limitations of dependency on only one industrial sector, the possible impact of the competition for investment on the level of wages, especially with high unemployment depriving the state from predicted incomes, not to speak of the possibility of a second wave of economic decline.

Tuesday, September 8, 2009

As summer recedes, public figures resume their work a new waye of stupidity strikes?

Not only I have returned from a long vacation accompanied by a hopefully exceptional silence, but the public figures of Europe and with them the media is filled with a new wave of opinions regarding the crisis, its consequences and effects in the individual countries. As if nothing have happened, and the mood of the economic world wouldn't be impressed by the new leading theme of "recovery" the first appearances were nothing else than sheer stupidity. Moreover, the cacophony and the surprise developments can undermine the very hope for a fast and strong recovery, especially in ECE.

Monday, September 7, 2009

Birth of a dangerous populist

One of the favorite way to conceptualize the present tensions between Slovakia and Hungary is to emphasize the populist politics and the according personality of Robert Fico, the Slovak prime minister. (Ironically, Mr. Fico almost never forget to portray the present Hungarian opposition and quite probable governing party after next spring, and its leader Viktor Orbán as dangerous populist and nationalist.) This line of reasoning has as its starting point the economic problems caused by the crisis and its consequences and as a consequence sees in the nationalist political measures and manoeuvers an attempt to preserve electoral support by way of diverting the public's attention.

Friday, August 28, 2009

Recovery everywhere - why to be scared?

Back from a long summer recess, although the lack of posts recently was not due to my activities (however overburdened I'm am with tasks and responsibilities) rather the lack of impulses and events. One could have seen a rising tide of good news (maybe even the favorite color has changed from green to a more ripened one), a series of countries posting positive growth figures for the second quarter (quarter-on-quarter, in yearly comparison it is rather pathetic) and economic sentiment soaring almost everywhere. As the latter is considered to be a so-called "leading indicator" (i.e. signaling in advance the trends of the respective economy) further economic expansion is expected in the coming month. The change was abrupt, and rather peculiar. While only a half a year ago (almost) everyone forecasted that the world is doomed, now (almost) everyone is prophesizing that our torture is already ended or it will soon end.

Sunday, August 9, 2009

Hot Caucasian summers

I must immediately apologize to my readers - to those making efforts for a more vivid discussion and to those reading rather passively either - as the topic of this post will have not much to do with ECE and its crisis. Of course, if one covers Russia's moves at its "near abroad" zone there is always a chance to point out some kind of significance for ECE as well, but I do not want to rely on such cheap methods, especially as Russia's relationship with Georgia is only very loosely connected to the economic crisis. (Last year the conflict happened at the height of rising oil prices, many people envisioning Russia's re-emergence as a world power on the back of this phenomenon.) But the newly arriving disturbing news from the region gives me a chance to reshape and reiterate some ideas of mine, not discussed publicly at that occasion.

Friday, August 7, 2009

Europe's bottleneck

I'm living a honeymoon with my driving license. It is not a month old and I try to practic as much as I can. As I'm no spending my time in the middle of Romania (Sfintu Gheorghe/Spesiszentgyörgy) I could have reexperienced something I have noticed earlier as a passenger. The lack of the necessary infrastucture of traffic. There are no transversal motorways, crosing the country, no suitable fast traffic routes. Some of the main European higways were rebuilt in the last decade, but it is far from being enough. Especially if one takes into account the fact that Romania is situated along one of the most importnat landroutes in the EU. As the Western Balkans is still not a part of the common market the larger part of goods transported from Turkey and the Balkans to the West is crossing the country, having no alternatives. And without the necessary infrastructure the country literally became Europe's bottleneck. Trailers crawling along the two-lane roads with steep curves...

There is no direct relationship with the crisis, at least in a narrow sense. But as Romania's fast growth in the last decade was fuelled not only by a credit bubble and the inflow of financial transfers from the guest workers but the lack of major infrastructural development and investment it reveals a side of the low tax low redistribution approach not emphasized in the good years: without the necessary budget incomes there is no way to finance such works. (To be fair with Romania, it was amongst the most shbby countries at the end of the communist regime, therefore its need of infrastructural development was extraordinarily high, especially compared to the level of its GDP.)

It is not a major finding, nor a great discovery, but maybe could highlight how complex the situation in many ECE countries is. It is not only an issue of one or two percent more growth or 5 or 10 percent lower taxes. Many of those countries needed a thorough reconstruction and not simply a transformation. And once again, a problem of a single member state has far reaching consequenes for the whole of Europe...

Friday, July 31, 2009

Moldova reloaded

After the riots in the wake of the elections in April the parliament in Moldova was unable to elect a president (according to the constitutional provisions a candidate needs 61 votes in the 101 member parliament, the communist party had only 60 MPs) and as the constitution prescribes early elections were held at the end of July. The results - although the communists still retained their position as the far largest party - are different enough to modify the balance of power, but not different enough to resolve the deadlock. The outcome is highly improbable, even though adherents of so-called pro-European parties are in a cheerful mood, celebrating the fall of the last communist government. I do not want to discuss the options and possibilities as I have very limited expertise on the Moldavian politics. But the situation has some underlying characteristics worth to outline, more precisely the distorting effect and influence of the application of a very limited dichotomy - pro-Europeans and pro-Russians - regarding the political divisions in the area on the perception of external observes.

Sunday, July 26, 2009

A new all encompassing science - the social biology of our age? Some provocations

At the beginning of the last century for many people the biology seemed to be the universal science, not only explaining the laws of nature but at the same time being applicable for the human society as well. Medical doctors, pioneers of genetics, ethologists saw the human race as living in a natural organism and behaving according the laws of nature. Social-darwinism achieved a certain popularity, individuals and nations (or countries) were seen as inevitably competing each other and for many, who were read to draw the inevitable consequences the emergence of superior and inferior nations or races were the natural course of history, supported by the laws of the nature. Based on the latter they thought themselves capable to prescribe the only possible social organization, assign everyone his or her natural role.

As these ideas - even if unintentionally - were present at the birth of and served as a root of the extremist ideologies - fascism, nazism - now they seem to be compromised and even though some scientist from the field of biology or medical sciences are today still convinced that the nation as a natural unit of humans could be explained by and should be organized according to the natural law, nobody really take them seriously. But if someone considers a bit more thoroughly the - rather vulgar - version of economics - or economic prejudices - prevalent today, some striking similarities can be discovered easily.

Saturday, July 25, 2009

Where are the queues? - Impressions from Latvia

If someone would like to visualize the Great Depression of the last century - the one that shaked the world between 1929 and 1933, with far reaching consequences - the first images to pop up would almost certainly be those monochrome ones with horrified people incredulously looking at the headlines or each other, incapable to grasp that a life's savings were lost literally in one moment, or the ones with peoples in ragged clothes queuing in front of a kitchen for the poor, hoping for their daily soup. Not that it was necessarily the general appearance of that crisis, but poverty, misery, hopelessness is dominant in its memory, and somehow defines our visual perception as well. Black and gray, shabby places, rags, dust and dirt.

In the last week I had the opportunity to visit Latvia and travel a bit around the country as well as in its capital, Riga. The primary aim of this journey was not to collect experiences from the middle of the crisis, it was a quite ordinary trip, at least it was simply a kind of holiday, even though our host proved to be an extraordinary one. But anyway, it is almost impossible to forget about the circumstances and the experiences and discoveries of a traveller, however vague, contourless and obscure they could be, will be measured against the background of the present economic misery. Even though if one is aware of the problems with such experiences, the usual behavior of foreigners either to miss the deeper context or to perceive a given place in a stereotypical, often contemptous way or admiring it without real basis and placing it in an uneven and unequal relationship with one's own country.

At the moment the first impression of a superficial traveller would be that Latvia is quite a normal place, where the signs of the crisis are still not visible. Thriving nightlife in Riga, shamlessly high prices, tens of thousands of young people at a pop-rock festival, middle class Latvians making boat trips, German, Italian etc. tourist groups do not signall the inevitable collapse or at least extraordinarily painful adjustment suggested by the economic data and commentators.

The signs of the problems are there of course, we spent our days next to a newly erected residential area, where only one flat from 280 had tenants and after some days spent in the country someone will inevitably make a hint for the spending cuts affecting people, first of all pensioners. But the crisis was not an everyday topic in the circles we were fortunate enough to move in, and even among those who mentioned it - besides those, who addressed the substantial issues as well - some people were speaking of it as being exclusively the fault of reckless banks lending money for those who are not capable to repay it. There was no explicit despair, feeling of the inevitable end etc. Latvia was rather colorful - vivid green, white sand, paler blue sea, yellow, blue and purple flowers, deep blue of blueberries and slowly reddening cranberries in front of the background of harsh green mosses, red bricks of the churches in Riga, light blue, yellow and shining white buildings - not the grey and black. (Ok, dust exists, but it wouldn't be ECE if just next to the National Theater one wouldn't find a shabby road with a dust covered tramway track :) )

Of course any of these observations (better to call them impressions as they weren't the result of any thorough examination or discovery) are only superficial and have no broader relevance. They can at best be anecdotal evidence, nothing else. And there are clear signs of the boom-bust economy, almost everyone uses a car at least one category higher than would be affordable according to their income compared to the "West", BMWs, Audis, Lexuses, Volvos, Mercedeses are running on the roads (otherwise infrastructure was not a favorite destination of money for investment, at least as far as I could have assessed), real estate prices were in an incredible height etc. But on the whole, up to this moment it is rather a pleasant crisis, still nobody really hurt, far from the apocalyptic imaginations. Not that it can forecast anything relevant for the future, it is just a single moment, frozen for eternity...

Friday, July 24, 2009

Rule of Law?

In the last post I've mentioned the efforts of the Romanian government to reduce budget spending, besides other attempts, in the judiciary system as well. Today the judegs fought back, or one can phrase it otherwise: the rule of law was upheld. The Court of Appeal in Bucureşti decided that the Ministry of Finance is obliged to pay for the judges of the Supreme Court every element of their payment as it was established by the respective law. Among others the 50% additional payments as special allowance for the stress, they should bear in the courtrooms. The decision is final and irrevocable, with no room left for further appeals.

The story is rather absurd, one can not easily dismiss the feeling that one court decided in favor of the other eying the implications of its decision regarding their own earnings. As the idea of not paying a decent sum for judges - in order not to make the common people furious about their income - instead disguise it with such rabulistic methods similarly belongs to the field of absurd. And at last there is the government's idea not to amend specifically the respective legal framework, instead implement a law on the budget, clearly contradicting the provisions of other legal acts in force, that way triggering an uncertainty in the structures of the state, it is also part of an absurd story. Not that it is really important, but maybe gives some insight into ECE's realities.

Monday, July 13, 2009

Detruisez l'Autriche-Hongrie - reloaded?

Indivudal states - as entities and historical individualities - are not eternal ones. A significant part of the world's and Europe's sovereign entities are relatively newly established, and many of the seemingly resilient ones went through phases in the last hundred years when their existence and/or sovereignity was in doubt. It is quite clear in the Eastern part of the EU, where every new member state didn't exist 150 years ago (or at least not in their present form and as sovereign states - for example Hungary or Romania), many of them was established as independent nations after the WWI but ceased to exist between 1939 and 1944, while others emerged as new "powers" of the region. The realignment of ECE happend again in 1945-1947 and after 1989.

The important point is that the present configuration of this part of the continent is not necesserily an eternal, given one sanctioned by thousands of years of history, or a divine action: it is a reasult of the collapse of greater frameworks of states, empires and would be nation states. Those who are familiar with the region's history will almost automaticly associate to violence, war, armed attacks on neighbours after reading such an introduction, especially after the rise of extrem rightist (and extreme nationalist) forces at the election for the European Parliament. But my only concern was to highlight that states can collapse, fail and be dissolved due to the circumstances. Some of them is simply collapsing, as its institutions can not control its territory, others' endgame begins at the fringes, with the loss of efficiency of the state administration and with the emergence of alternative powers at the local or regional level, others simply implode due to their incapacity to fulfil its tasks and responsibilities towards its subjects, and these factors can coincide with each other. But, although in many times a kind of external impact - in the form of war, crisis, presure from a great power etc. - plays an important role in it, the internal incapacity (impotency) of the state is almost never lacking among the factors behind such developments. And - as it is a lesson from these events - even the largest and seemingly quite stable formations can be dissolved very rapidly, at an astonishing pace.

Maybe we can see similar processes at the fringes of the EU today. Countries, struck by the crisis, without room for manouvre and having lost a significant part of their state revenues, compelled to follow prescriptions of great creditors who rushed to their aid and bailed out them, are in more and more dire situation, as they are forced to cut down their public services. The budget cuts in Latvia are affecting the public instruction system, the health care (for example certain surgeries will only be available for clients of foreign helth insurance systems from the autumn, as the Latvian helath care will cease to finance those for Latvian citizens), maybe the police, the judiciary system. In this case it is the result of accross the board budget cuts, but other examples exist in Romania or Hungary as well. In the latter the state financing available for hospitals was reduced significantly and only the reduction of their services could lead to some balnce in the expenses and revenues. (Meanwhile the cuts in the contributions of employers and employees to the health care budget will significantly worsen the financial situation of the health insurance system.) In Romania the lack of funds is almost everywhere, but it surfaces quite sporadically, either in regional or in sectoral terms. According to press reports one county tribunal will be closed in August due to the lack of financing, the salary of judges will be cut with 1/3 of it (in a country where - accoding to the EU's assessment - corruption is in full bloom, and the state is incapable to act against this phenomenon decisively), in many cities there is not enough money to open the schools in September etc. Although the government insists that they will provide at least the necessary basic financing, it is far from being certain, especially as Romania has to comply with the conditions of the IMF and the EU in order to receive the individual tranches of its huge loan.

Not that it would be exclusively a fault of the external world. The Latvian government is desperatly defending a currency peg from an eventual devaluation (and from this perspective salary cuts in the public sector are lying on the road to "internal devaluation"), the Romanian is caught between electoral promises last fall, an uneasy coalition of "social democrats" and "conservative liberals", an alliance for Romania('s wealth), really aimed to divide the resources of corruption among them, and between the coming presidential elections, while in both countries the "econimc miracle" of the last years was "financed" with low taxes and growing consumption - based on loans and loans and loans, leaving no buffer for a case of crisis.

But the most worrying development is concerning the future of the EU. The predictions - forecasting problems in the coherence of the eurozone - are not ceasing, while the handling of the crisis highlighted the deficiencies of the inter-governmental approach in times of crisis. The reluctance of the Germans to develop a real common perception of the crisis, to allow European institutions to act independently (although those never has shown much willingness to act that way) although comprehensible, was certainly not benefitial. And as Wolfgang Munchau points out: after the Constitutional Court's decision on the Lisbon Treaty everything will be even more complicated. Even in the field of common economic policy. Not to speak of facing the real problems, the incapability of ECE in the long run to dael with its underlying social problems and with the impact of the demographic trends without a common social policy. But if the slow dissolution of the East will continue it could easily reach to the heart of the union itself.

Thursday, July 9, 2009

Where is the success story? - Bulgaria after elections

No, I won't give a detailed analysis, only some impressions, especially because I'm not quite acquainted with Bulgaria's internal situation. (Although I had the chance to read a text from a local economist, predicting that even though the government tried to keep the surface of normality and suggested that the country has no problems resulting from the crisis, it was nothing else than mere electoral politics, an attempt to avoid greater losses at the polls.) But the story of elections in Bulgaria in the last decade is telling in a sense: the winner was never able to repeat its performance. Moreover not one of the strongest parties of the successive coalitions governing the Bulgaria slid into oblivion, (at this election this not altogether positive role fell on Simeon Saksokoburggotski's party, the former tsar of Bulgaria led a government between 2001 and 2005 and his party formed a coalition with the socialists and a Turkish minority party in 2005), while, with the sole exception of the socialists, always newly emerged parties prevailed. That kind of volatility is quite interesting in itself, given the fact that the EU membership would presuppose the existence of a consolidated democracy - at least in theory.

But the really striking phenomenon is that the electoral defeats of leading governing parties, following each other as almost being one of nature's laws, occurred during a decade of stable and steady economic growth. According to Eurostat figures in the last 10 years (beginning with 1999) the Bulgarian economy never experienced negative growth, the growth rate was only once under 4% and five times over 6%(!), in the last five years, the GDP reached a stunning 166% of the value of 1999 in 2009. Although the country remained the poorest in the EU, there are only a few other places where governments would have to face imminent defeat after so successful periods in terms of economic achievements.

And despite the "success story" (a Bulgarian blogger, whose site I've found quite incidentally expressed his pride over the fact that last year Bulgaria was the fastest growing country in the EU) no one was capable to win. Even though the country was on its way to become the new model economy, with low flat tax rate (10%) and low redistribution rate... Isn't it an obvious contradiction to the models and forecasts?

As mentioned earlier I can't give a convincing answer to the question arisen. Maybe the everlasting transition period is too long for many people (there is never a calm in the transformation, always new reforms and "reforms" have to be implemented, maybe even a decade of growth was not really raising the standard of living for the majority of the population, maybe corruption is unbearable, while the state - not least because of the lack of necessary resources due to the low taxation - is incapable to deliver justice, law and order - Bulgaria, according to various accounts is infected with maffia). And all of these are embedded into something specifically Bulgarian, as many of these can be identified in other countries - in the Baltics, or the high rate of corruption in Romania* - where it never had similar consequences in terms of the emergence of new saviors at every elections. But one conclusion is inevitable - the advocated model is not bringing its results as naturally as it is perceived by its promoters (and I can't refrain from some populism, its promoters with high salaries in comfortable offices and travel allowances), neither in terms of raising living standards, nor in market efficiency (are there anybody considering a high rate of criminality in the economy as a sign of an effective and efficient market?) nor as political success.** Once again, human society proved to be beyond the understanding of simple mathematical models...

* Paradoxically the Romanian case can prove the importance of corruption in the emergence of the investment and business-friendly image of a country. Although Romania was for a long time praised as a low tax rate country with simply tax system, in reality it consisted more then 150 different taxes, tolls, fees etc. to be paid by companies. But it was always possible to evade them with some bribery in the responsible government of local authority. Corruption was the only way to promote Romania as business friendly, and it worked.

** These assumptions were - although only partially - reinforced by the case of the Slovak government led by Mikulás Dzurinda. It lost an election amidst the "Slovak economic miracle" in 2006.

Friday, July 3, 2009

The Markets, oh the Markets!

Last week the Hungarian governemnt achieved a great "victory", the parliament passed a bill on the taxes and tax system in next year, modifying the structure of taxes, with cuts in the personal income taxes and the social security contributions and hikes in VAT, introducing a new property tax etc. It laid the foundations of the next budget and it made the ministers quite proud of their production. Moreover, the government was 75 days old and it gave an opportunity for the prime minister and the finance minister to give interviews on the progress made by this new, brave body fighting the crisis so effectively. (One should ask, why is a prime minister, who is admittedly not seeking political career after his term will expire, so keen on making pr, but I really don't know. Maybe he is afraid of the possibility that his parliamentary majority will collapse, but I would doubt that it is the proper way to fight it. And PR-interviews - especially in the Hungarian case, where the "questions", due to the tragic quality of journalists and journalism, seem as if they would have been prepared by the Prime Minister's press secretary - are not only boring, but unconvincing, without any originality.)

Anyway, the finance minister and his boss pointed out that their success is signalled by the markets as well. The strengthening of the forint is a sign of the returning trust. I understand, that sometimes those who are in political positions, feel the necessity (and sometimes they are even compelled) to make stupid statements, in order to gain popularity, portray themselves as capable individuals etc. But this government is supposedly an expert one, the finance minister arrived from Deloitte. I don't really think that he has no idea of the current situation: there is no credible sign of an individual assessing of the forint and its movements against the dollar and euro were and are driven by fears regarding the state of affairs in other countries (most notably in the USA and in the eurozone) and by mere speculation, the so-called carry-trade. Or, with other words: the current movements are the result of a very high interest rate of the Hungarian National Bank and the willingnes of the so-called investors to see green shoots everywhere. Nothing specifically Hungarian, as everyone can see, who compares the movements of the currencies from Poland, Hungary, the Czech Republic, the first one and the latter being considered as more stable economies than Hungary.

But the really frightening probability is, that the minister can be convinced of his truth. Not necessarily because in this case he and his government tries to please actors, who do not really care about its activity, but because sometimes it shows a quite simplistic obsession with the idea of the efficient markets. Well, it is a viable econimic theory, that was capable to make tolerable predictions for decades, but in the light of the recent events even those, who were not aware of its problems are ready to admit that at least some refining would be needed. And as a perspective of the human society, it is rather frightening, as it tries to reduce its complexity in one single indicator: market price.

Moreover, as in the last few weeks I had an opportunity to glance at many products (analyses etc.) from market actors (due to some kind people dealing with economics or the economy, with quite different views) and as a result I'm increasingly convinced that those are less complex than it would be necessary in times of economic turbulances. Not that they would be useless, but they use only a limited range of indicators and data and sometimes too obsessed with the mathematical models, instead of leaving some room for the good old intutition. Although predictions based on the mathematics and market conventions turned out be very risky nowadays.

But this is not the only problem with the Hungarian government's actions. As they are keen to please "markets" and consider as the sign of the success of this efforts the strengtheing of the forint, they are slowly giving up the advantages brought by the rapid depreciation of the national currency and its relative stability in the last two months. The competivity (what they are seeking with tax cuts in a dire budgetary situation, therefore compensating it with budget cuts, equally hurting consumption as the tax cuts are inspiring it) gained suddenly and unintentionally (the eternal comparison, Slovakia was behind Hungary in terms of labor costs at the beginning of the year, although the "experts", among them the minister himself, always complained that Hungary lost its competivity regarding cheap labor to Slovakia, and it was a reason behind tax cuts and social spending cut proposals) are now trickling away. Even though there is some reason behind it - reducing the debt burden of those, who are indebted in foreign currency -, it is at the same time simply the mirror image of the much despised politics of pleasing inactive voters with financial transfers through the social security system. It is very much an attempt to satisfy middle-class rent-seeking, placing the complete burden of adjustment on the shoulders of those, who are living from sthe social security systems. and even though there are many inactive people, who would be capable to work, the lion's share of this group is composed by pensioners and by those, whoe are really living on a subsistance level, without any hope for a decent work. This politics is not seeking the just distribution of the burdens of the crisis, it tries to privilege a group, that bear some responsibility for the situation of the country, as they were ready to take a huge debt burden, many times with repayment rates higher than the half of their otherwise not too large income. And as it is clearly hurting the long term perspectives of the country (Hungary abandoned even the moderate room it acquired through this strengthening of the forint in terms of monetary policy, as the HNB is focusing on the debt level and not on the exchange rate yielding advantages, therefore it is not ready to lower interest rates), either as an economy, or as a society, it is equally problematic, as the rent-seeking of the inactive groups.

The other privileged group will be the entrepreneurs. The tax cuts are aimed to ensure they lasting competivity through making labor cheaper. Although personally I don't think that eternally lowering labor costs through abandoning every public service is a viable strategy of growing welfare and standards of living, this time I would only point out that - as I argued some posts earlier - without a growth of the capital in the economy it is clearly a hidden state subsidy for non-competitive companies (the state subsidizing even negative marginal products of the newly employed labor with renouncing some state incomes), and as usual in those cases it will probably bring only more private profit from public money. It is possible, that in the long run it will really bring some raise in employment rates, but I'm doubtful regarding its effectivity, at least its effectivity imagined by the minister. But it is another story...

(Oh, and meanhwile flagellant exceptionalism surfaced in Romania. A well known blogger counted 13 factors of Romania being affacted worst by the crisis. :) Maybe my next post will cover this funny topic.)

Wednesday, June 24, 2009

Why do statistical offices exist?

My preferred Romanian politician, Mr. Băsescu swung into action today again. At a conference entitled "The Future of Social Change: 1989-2009: Visions and Perspectives after 20 Years of Transition" he vigorously attaced the lazy and populist Romanian politicians as - according to him - Romania is in danger to become a country of peoples depending on social assistance. Mr. Băsescu - who recently began to play safe on economic issues, he even contradicted the optimistic forecasts of the Chair of the National Bank and predicted a lasting contraction of the economy - interpreted the facts quite peculiarly. It is probably true (I havn't checked it, I only rely on other data) that a half of the country's nominal population receive regular social assistance in the form of some payments. (It is actually more than half of the real population, as millions are working abroad.) But the alleged reasons for it - populist politicians, except Mr. Băsescu himself, of course, buying votes with social transfers - is a gross oversimplification of the social processes of the transition period.

According to official data the number of employed people in Romania, a country with a nominal population of 22 million, and a real one somewhere between 19 and 21 million, is at around 4,6 - 4,8 million. (Just a slight comparison: in Hungary, a country of 10 million, where the official rate of employment is not higher than 55-56% the sheer number is 3,7-3,8 million.) Moreover the ratio of active people and those who receive pensions - either regular or so-called agricultural ones* - is below 1, at around 0,98. That means: less than one working Romanian bears the burden of providing one inactive with some kind of benefits. It is usually not considered to be a healthy and sustainable situation. (It is true that the financial transfers of guest workers make this picture less disastrous, but as it is unofficial the state can not lift its responsibilities using it as a pretext, nor enjoy some decent income from it.)

The phenomenon was a result of the transition itself, when - not only in Romania, but in many other ECE countries - the suddenly rising unemployment was "cured" by allowing people to escape into the pension systems, momentarily relieving the states from the discontent of its citizens, but in the long run causing ever growing demands on the social systems. But even retrospectively it is not clear whether this treatment was a complete failure or more logical than it seems. In many cases (Hungary, Poland, Romania, Slovakia) the respective economies never really regained the lost workplaces (in Hungary the volumen is 1 million!) and even though outmigration was a factor rapidly depleting the reservoir of unemployed people in some cases (Romania, Poland, Slovakia) the rate of unemployment remained high. (Romania was seemingly an exception, but with the huge number of pensioners it is only a statistical trick.) The FDI focused policies were not capable to ensure a low level of unemployment in two decades and with the crisis hitting ECE and undermining the former economic model it is not clear whether the nearest future will bring further opportunities.

The situation is aggravated by the fact, that Romania experienced a long period of sustained high inflation and the wages remained relatively low in order to achieve competivity. The former led to a rapid loss of real value of social payments, the latter led to the necessity to rein in state income - due to lower taxes - to give a bit more to the "ordinary people". (It was also a core element of a perceived competivity advantage, although personally I consider this argumentation dubious.) Nevertheless, state income remained low not allowing to raise social spendings, but at the same time personal income was not growing rapidly as well (except in the last two years, but it was a result of overheated economic growth, tightening labor market, therefore unsustainable, and even with this rapid rise average wages remained the lowest in ECE, except Bulgaria, somewhere around 250-300 euros a month. Therefore it is not surprising that not only pensioners but other social groups need state assistance for various reasons. (For example some subsidy or support to the natural gas consumption, that can amount in winter months higher than the monthly income of a family.)

But, not denying the role of populist politics, in Romania and in other ECE countries, the main factor behind the extended social provisions - and their limited effectivity as well - is the process of transformation itself. There is no better example for it than Romania, with its large poverty stricken social sectors, shabby infrastructure (a source of balanced budgets in recent years was the lack of investment in those areas) lifting costs of social services and low wages in order to ensure competivity. From this perspective, Mr. Băsescu was not right, rather he completely missed the point: it is not a a shame but a necessity to be a nation of socially assisted people and the only option to alter the situation is to get rid of every kind of social responsibility of the state. (Even minimal ones, as for example average pensions are not higher than 100-150 euros per month, not a huge amount for decent living, but a real burden on a state household determined to lift every tax from enterprises.) But even in this case there would be a half of the population left without the necessary means for a subsistance.

* In Romania two pension systems exist, the regular one and the so-called agricultural. The latter is composed by people earlier working in agriculture during the communist era and paying contributions into a separate system.