Back to the future?

Last April the then-minister for economy, delegated by the liberal party, made a roundtrip in capitals of ECE, where he found fellow liberals in the government. As he was that time already abdicated (the liberals collided with their socialist partners over the necessity of reforms, especially in their form advocated by the liberal ministers after the governing parties suffered a heavy defeat at a plebiscite), it was rather a demonstration of the successes achieved through policies (flat-tax, low social expenditures and redistribution rates etc.) similar to their proposals. At about a week ago this former minister, now chief-whip of the parliamantary club, published an article in the leading newspaper of Hungary recalling this experience, once again arguing on behalf of flat-tax and its accompaniments, at the same time making a hint, rather gloatingly, that he was right even ten month ago.

As Hungary is heavily affacted by the global crisis, besides the government other organizations and institutions are seeking the way out and that kind of ideas has many adherents, actually it is the dominant view among economic organizations (Association of Industrial Entrepreneurs, BIG4 etc.) and among mainstream economists and so-called economists, in fact many of them analysts working for large and not-so-large financial companies, obviusly having more degree form this field than me, but not necessarily as many academic publications. (I must admit that for almost a decade I researched topics of pure or at least tangentially economic history. Even my PhD was conferred for a dissertation on the history of banks of the Transylvanian Saxons, but it does not mean that I have real expertise and will pretend here as someone with economic knowledge.) Anyway, the ex-minsiter found it the appropriate moment to announce that his party was right and it is high time to realize those reforms and at the very same day heavyweight economists (well, it is by Hungarian standard only) threw their full weight behind his party.

Even though there is not much contradictory opinion present in the public, the whole story is highly ironic. As this ex-minister visited Tallin and accompanied by the Estonian prime minister announced the superiority of the Estonian tax-system and the economy fuelled by low redistribution rate compared to the Hungarian situation (he retold this event in the aforementioned article) the small Baltic state already entered the phase of recession (and primarily not because of the looming crisis), predictably a serious one, while Hungary was not yet affected by the crisis. His other example, Romania, from where he once again delivered his message to Hungary, was considered to be on the wrong track of overheated economic growth driven by a housing bubble based on transfers of Romanians working abroad. But, regarding this latter country, even more interesting is the fact, that the revenues of the Romanian budget simply collapsed in the last two months of 2008 (the budget deficit as ratio of GDP more than doubled), in a period when the country was hit by the crisis, because the level of state income from VAT remained well under the expectations due to a drop in consumption. In case of Estonia they are not only thinking of amending their tax system, the Estonian finance minister is considering a lasting raise of the redistribution rate.

One interesting observation can be that these pieces of news were not heard in Hungary, but it is only of secondary importance besides the real questions never asked from the advocates of the same policies as one, two or three years ago: why those measures, allegedly making economic development sustainable, robust and therefore economies impregnable, obviously didn't work? Although there is certainly truth in the opinion that the economic policy of the Hungarian governments was at least sub-optimal in the recent years, in the light of the recent events it is hard to evade the problem whether the ecnomic model emerging after the transformation is still capable to ensure economic and social convergence of these countries to the core of Europe (more sceptical people can even rephrase this question whether it was capable for this task at all) and whether difference in the tax-system and redistribution level is really a substantial difference on the long run?

This one won't be the post of in-depth anlysis, but at least three aspects of the problem can be raised even here, especially as those are not considered by the experts and "experts" who recycled their earlier plans, designed among quite different circumstances.

1. The primary supportive argument is based on competivity. According to those who are still convinced that this is the only way out not only from the crisis but from the lagging growth of the recent years, Hungary and the countries in ECE are competing for FDI and as cost of labor is lower in almost every other country, Hungary has to accomodate to this fact. With tax cuts and budget cuts especially regarding social expenditures (thier rule of thumb is a mechanical comparison, if let'say Slovakia's similar spending amounts to 16% of the GDP, than they has to be followed) and state burocracy. Maybe it is an argumanetation not easy to dismiss but as the flat-tax, low redistribution ratio model was portrayed not only as a rational choice but as the only possible one and as the basis of robust and sustainable growth it is legitimate to point out that no country, regardless of its tax system remained unaffected by the crisis and even some model economies were the first one and many of them are among the most heavily hit. (Not only in ECE, but for example Ireland.) It could raise the problem whether not the tax system, but the very model of integration into the world economy is the real reason behind the effects of the crisis? Almost in every country - the lone exemption is Slovenia - foreign capital played the role of fuelling the economic growth, while goverments, reasonably, tried to accomodate the conditions to the needs of investors, keeping the cost of labor relatively low. But, as it turned out, the societies - in a world where it was easier to compare their standard of living to the Western countries and their production as a result of their work seemed very similar (please, report himself every worker in a factory who knows the real content of the "mysterious" productivity!) and these countries were acknowledged as parts of the West - were eager to catch up with their fellow Europeans. (Own a house, buy a new car, travel abroad etc.) Although tight fiscal policy - especially in Hungary - was promoted as a means of preventing people to spend more then they produce, the integration of the European financial system led to other consequences: people borrowed money they were not earning or receiving through social transfers. We know the result. But maybe both the FDI fuelled economy and the overspending from foreign credit can be structural similarities more important than the differences of the tex system. (Not to mention that those arguing in favor of the flat-tax model in Hungary still use those subtle nationalistic notions and arguments, pointing out countries traditionally seen contemptously by Hungarians, as having overtaken Hungary, in some cases without any basis.)

2. If the relegated position in the Europen integration (someone to the left from me would call it semi-periphery) is a common, structural factor of the ECE economies could the modification (let's call it reform, as those supporting this idea do) of the tax system really result in a long, sustinable growth and real convergence, as it was promised and predicted earlier? (Once it was quite popular to measure how long will it take to reach the per capita GDP level of the EU - on PPP basis, of course - either for Hungary or for its fellow competitors. It was prophesized that 10-15 years is a realistic assumption, with a flat tax system.) Didn't this crises revealed the limits of this model as well? The complete dependence on resources from outside, that can be depleted almost immediately, the abundance of which is hardly to return soon. Can the catch up be realized without profund change in the structures of the economy, a substitution of the industrial sectors based on finishing products, like car making industry, for knowledge based sectors?

3. This question is especially important as the demographic prospects of every country in ECE are very bleak. (Surprisingly, Hungary belongs to the countries with a relatively better future, at least according to Eurostat predictions.) In Latvia drastic drop (30-40%) in the available workforce is predicted in ten years, and on the long run it is forecasted to be a univrsal phenomenon in ECE. The situation is aggravated by the fact, that - contrary to the assumptions of the supporters of flat tax-based competivity - the progress regarding employment was more bound to the emigration of workers than to the alleged positive effects of the lower labor costs on the employment rate. Plainly speaking, the present economic model as it is based on lower labor costs could have a side effect of pushing out a considereable part of the workforce from the country, and their return with time is far from being granted. More pointedly: it is possible that the advocated model uses up the resources of future economic growth even faster then the usual process of making debts and clearly not able to contribute to slowing down the negative demographic process, not to speak of stalling it.

+1 Well, this is the reason of writing the whole post: did anyone, advocating proposals developed many years before the crisis tell us how the future economy, after the effects of the crisis will settle, how it will be reshaped? Will their ideas be really appropriate for those circumstances, especially as the crisis certainly has proven one thing: ECE's integration into Europe is too far-gone? The answer can be dismissive regarding profound changes, but in that case I would expect from those championing this model not to answer with a wholehearted 'no' the question whether the economy will be the same after the crisis as it was before, as they are doing at every occasion.

How to betray something non-existent?

At the weekend a prominent Hungarian politician, as he was attending a public discussion in Vienna, made a harsh remark on the present situation in ECE. According to reports in the press he accused Western Europe for betraying Central-Europe in the crises. He argued that banks from the western part of the continent were eager to buy financial institutions in the region following the regime change and in the process of transformation, but they are seemingly reluctant to provide them with the necessary means to keep their solvency among the present circumstances. Even governments can be accused with betrayal - followed this politician - as they are bailing out the mother institutions in their home countries, that way making the difficulties in ECE more apparent, and putting more pressure on the financial systems of the region, instead of helping where it would be necessary. "Western Europe denounced its agreement with Central Europe."

It is arguable that those remarks were not quite important (there is an abundance of critic on the governments of the EU these days, moreover even the daily Der Standard, co-organizer of the event was not generous with details, the report on the event was soon substitued by others at its website) but the problem is a significant one. Not the politician's opinion - I would like to avoid the bit too widespread practice of taking quotes out of context and making a devastating critique of them -, rather the sudden emergence of the idea of ECE as an existing region. As I can recall the last two decades, only a handful of politicians and intellectuals were keen on the idea of ECE as something real or at least something to be constructed necessarily, and our hero from yesterday was not among them. ECE was forgotten for a long time and noticing this sudden change I would like to pose the question how was the region perceived and whether this event is a signal of a significant change?

I would admit that it is not easy for a superficial observer to accept that notwithstanding the almost obligatory rethorical invoking of ECE in the last two decades by politicians and intellectuals, its content never was to accept the existence of the region as a specific entity, rather an exercise to be fulfilled in order to be let in to the good company of Europe. ECE or Eastern Europe or Central Europe - synonymous for many - has a long story as an idea but much shorter as a real entity. I won't say that it was non-existent in a geographical sense (from a political, geopolitical point of view), as a distinct zone identified by processes of economic and social history, but it rarely has a coherent history as a region conscious of its own existence. Even though common fate in the period between the end of the WWII and the fall of the Berlin Wall seems a possible constituent element, the countries belonging to the COMECON never constituted an area of free movement and a common market. Quite the contrary, frontiers and administrative restrictions limited the visits to other (so-called) socialist countries significantly and the ruling parties often effectively used age old techniques to depict “friendly” nations as inferiors in order to strengthen their position at home. (An example and a kind of self-critique: after the introduction of martial law in Poland the official propaganda in Hungary tactfully used the well known lamentable situation in that country – lack of elementary consumable goods while those were relatively in abundance on the shelves of Hungarian shops – to develop an image of the Poles as lazy people. The contrast, of course, served the political aims of the Hungarian party as well.) Although small groups of the opposition in the different countries were aware of the existence of each other, the process of the regime change was neither a result of their cooperation, nor were their efforts coordinated, the individual transformations run simultaneously, sometimes influencing each other and the former one strengthening the later, but every country has its own, separate story, regardless of the others. Therefore on January 1, 1990, when the collapse of the regimes was clearly irreversible, no united ECE emerged as an entity. A post on a web log is not the most appropriate place for an in depth analysis, my point is only to emphasize: even if the simultaneity and the identical substance of the events conveyed some coherence to the region, it was only momentary and rather a result of the perspective from outside.

Nothing really changed in the next two decades. While a handful of intellectuals were searching for ECE, they had no real influence on the events. Although dominant parts of the elites in almost every states that regained their sovereignty were speaking of a “return to Europe” or a “reunification with Europe”. Plans of the transformation process, later proved to be illusory, expected an early accession to the EEC (later EU), but in every country this process meant a separate, individual integration, regardless of the other states. It was really paradoxical, as the “West” set the same preconditions for the accession and the transformation required the same policies: adaptation of the legal and institutional frameworks of market economy and liberal democracy, according to models proposed by experts from the “West” and later according to the aquis communautaire. Once again the outer world bound these countries together (although not based on substantial similarities in the societies, only because of the identical program of change), but their respective elites were conceiving of the situation differently. Even though some initiatives of regional cooperation (most notably the so-called Visegrád Countries – today V4) existed, the societies in ECE were living in a permanent competition with their neighbors for the integration. It is hard to tell whether it was a concept really accepted in broad parts of the societies or large groups remained simply indifferent, but it dominated the public discourse. The integration of the own country was represented as an individual process, independent from the other countries, or, even worse, as something to be achieved on the expense of those. (In Hungary there were calls for blocking the accession of some neighbors, because of conflicts regarding Hungarian minorities, in case Hungary would have been joined the EU earlier than those countries.)

ECE soon turned into a bunch of front-runners and laggers. Politicians, experts, articles and studies measured progress as compared to the results of the other countries. Prime ministers, presidents requested from the EU not to stall the accession of countries supposedly having advantage because of some obscure principles and let them in as soon as they fulfill the accession criteria or, quite the contrary, called for the equal treatment of every state in the region. (Obviously in order to avoid being left out from the first round of accession.) Czech politicians glady get rid of Slovakia in the hope to reach the safe harbor of Europe easier without that ballast. Romanian leaders saw their country doomed if Hungary would have become EU or NATO member earlier. Polish governments were fighting for farmers of their own, ready to make compromise on the expense of the others. To make things worse, at least from the perspective of the existence of ECE as a region, the evaluation of the state of the competition was usually based on very peculiar criteria. Which country was more successful in privatization, which country attracted more FDI, which country has more car making plants? Later other elements were added: adaptation of certain tax systems (flat tax), and fiscal policies (low redistribution rate measured with a ratio of GDP, cutting of social expenditures in the budget). Moreover, the whole process was conceived as synchronic, linear with one stage and a clear target: catch up with the EU. It is not allowed to assume the possibility of distinct stages in the transformation, transitional periods with new challenges. According to the dominant opinion the application of a model free market economy is the only necessity and will automatically lead, without interruption, to the desired result. Therefore problems with the economic performance while other countries seem to have a perfect development can only be a signal of imperfect realization of the theories.

The competition was perhaps inevitable, but the way the elites handled the situation was far from helping the emergence of a kind of coherent ECE. There was not much eagerness to know the realities and similarities of these societies, the social processes accompanying the transformation, the very similar role in and the almost identical ways and models of integration into the European economy, the similar demographic changes and challenges and the negative effects (for example mass emigration of the workforce from some countries with rapidly aging populations) of supposed and real successes. Instead the public discourse was and is full of news of differences presented as factors behind the perceived success of the other country and proposed as the only possible solutions for problems in the own. Success is almost always conceived as a front runner position in this strange competition, continuing even after the EU accession, and the aim of the proposed changes at home is to retain this role. The reward? More car making plants, more praise from the EU Commission for budget cuts even if the respective government has surplus, more mortgage denominated in foreign currency, widening social differences … The image of other countries and societies? Slovaks are those rapidly developing guys with flat tax and the highest per capita production of cars. Profound knowledge of a country only fifty kilometers far from the Hungarian capital, isn't it?

One should mention, at least in the case of Hungary, another important element of this discourse, clearly in opposition to the existence of a coherent ECE: the use of national prejudices. Those, who are familiar with the history of the region know that in the course of the last century many tension arose between Hungary and its neighbors. Although today it is not a major driving force of politics and not a significant factor, it has its remnants in the public perception of the other nations in the region. Based on traditional elements of the Hungarian national consciousness the image of Slovaks or Romanians consist many negative characteristics. Like Romanians are considered to be lazy, deceitful, thief by many Hungarians, Slovaks are perceived as backward people, their culture inferior to the Hungarian. (This view is not unanimously shared, but prevalent in broad parts of the Hungarian society.) Therefore if a politician cries out that Hungary is lagging behind Slovakia or Romania it not only means that we have to work harder. There is an underlying message to understand: those inferior people are overtaking us, it is impossible, a national disaster, the highest injustice. Maybe it is a useful political tool (the actual government has to bear the full responsibility for this catastrophe), but many politicians (among them the one invoked in this post) honestly share this view. (Every new car making plant in Hungary was an subject of national pride and proof of Hungary's grandeur, every new plant in other countries an opportunity for national shame and lamentation.) It is not hard to see that this perception of the competition of countries in ECE is far from supporting the idea of an existing and coherent region. It would be relieving to say that this practices are confined to the periphery of the Hungarian political spectrum. Sadly, it is not only prevalent in the non- or not-so- nationalistic circles, but even accompanied by another peculiar view and construct: self-stigmatization. For many liberals and leftists, who think of themselves as flag bearers of progress, the presumed advantages of the other countries serve as proofs of their conviction that Hungary's historical development run into a dead end sometime in the 19^th or 20^th century, that we should overcome semi-feudal remnants of the Kádár-era (the period between 1956 and 1989), or that Hungarians are natural losers, unable to understand their real interests and give up social security. Supposedly lagging behind is only the result of those deficiencies in the history and/or in the national character, once again neglecting the transformation of ECE as a regional phenomenon and possible subject of analyzes.

To sum up the mental map of ECE, both seen from the “West” and from the region itself, the result is a very peculiar one. While those countries seen from outside has something coherent (the EU even made pressure on the accession countries to institutionalize ECE in the form of CEFTA), for most of the inside observers not only ECE dose not exist, but even the individual countries lack any coherent image. Their own country has a special, privileged position in the middle of nowhere, connected only to the “West”. Although there are other states around them, those are again individually connected to the “West” and not to each other and they are only important as threats to the privileged position. Therefore the “competitors” has only very obscure images, always focusing on differences. ECE is not a result of its inner coherence (perhaps existing as similarity of its societies and their social processes), but a construct of the outside world.

Otherwise, I'm a supporter of the idea that the EU has its responsibility in saving ECE from disaster. But as long as we do not construct our own region, we can not be betrayed.

Why now?

Because of the crisis, obviously. Even though the question 'how to handle the crisis' has now the foremost importance, it is also a chance to think of more substantial problems than it was usual even a year ago. Although the careful observers could have found signs of systemic difficulties in the so-called transformation countries, in Hungary these were not taken into account. The public, academic and political discourse relegated those to the periphery and treated the lagging economy, the growing tensions in the society as if they were specifically Hungarian phenomenon caused only by incompetent governance and an irresponsible opposition. Lack of information on the countries in ECE led to an illusion that there is a fast and sustainable growth and convergence to the EU 15 in so-called exemplary countries like Slovakia, Estonia, Czech Republic or even Romania and Bulgaria and only Hungary has significant problems. Moreover, it was heavily capitalized by many political and intellectual groups as well. Therefore it was considered as "heresy" to speak of the crisis of the economic model of the transformation, to express doubts about the new fetish of flat tax as the only precondition of sustained and rapid economic growth, to point out that even the rate of GDP expansion experienced in some countries didn't result in a higher standard of living in a broader part of the society (or only with the expansion of credit) and the better employment rate was in a significant proportion due to the emigration of the workforce , to argue that it is not a realistic assumption that in countries with a democratic political system a low rate of social expenditures and a low level of personal income can be kept for decades after joining the EU and taking into account these and many other factors the countries in ECE are facing the same challenges as a result of their almost identical integration into Europe's economic system.

These problems (and a lot more) are not easy to raise in Hungary even at this very moment, but at least they are not a taboo any more in the world. The rapid development of the crisis destroyed the myth of invulnerable and super-competitive flat-tax economies, the unrest in those societies after the austerity measures reaveled the importance of a certain degree of social consensus instead of the "we know it better, your duty is only to suffer" behaviour of the intelligentsia and the common vulnerability of every "emerging" economy in the region ironically restored the neglected and never really accepted region of ECE. An inescapable reality.

As those topics are even now not in the center of the public discourse in Hungary (it is illustrated by he fact that last Thursday a former minister of economy proudly remembered in an article published in the largest newspaper of the country that he had announced the superiority of Estonia's reforms and financial system ten monthes ago from Tallin, while some serious Estonain politicians are considering tax raises, a larger ratio of the taxes to the GDP and even an abandonement of the flat tax rate at this very moment) I decided to publish my observations and reflections at this site. They will deal with many aspects of the crisis and its events, from doubts and questions regarding the viability of the present model of economic integration and the interdependence of Europe as a result of integration and globalization, to the existence of ECE as region bound together by similar social processes, and economic modell (that way at the moment only defined by outside) and to the incompetence or deliberate deceit practiced by experts and scholars as a sign of a peculiar mental map ignoring every other country in the region and their similarity with Hungary, using them only in a nationalistic context with a self-stigmatizing emphasis. (I know it is obscure at this point, but I will be more deatiled in a later post.) As I'm not an economist, only a historian with some modest knowledge of other sub-disciplines of the social sciences there will be many aspects I will rather adress with questions, highlighting problems and not with categorical assertions.