Saturday, May 16, 2009

Never say reform again? - Despised words and obvious bias

The release of the GDP data gave an opportunity to quickly assess the situation in ECE and Reuters did it with an article yesterday. Although the piece is not unbalanced, it has some peculiarties in it, showing incoherence in the picture and the argumentation. (Although it is rather a report then a text expressing opinion, the concluding remarks disguised as a citation from Katinka Barzych, clearly shows the preferences of the authors, more reform is needed in ECE.) Especially the part about the two types of ECE economies is lacking any real factual basis and can only be interpreted as a sign of an effort of those analysts who visibly failed as experts, to uphold their views and their personal legitimacy. After yesterday's data it is really questionable to make a significant difference between so called reform countries - Poland, Czech Republic and Slovakia - and "reform laggards" like Hungary or Bulgaria (!). Especially in the case of the latter, where not only a budget surplus was achieved - that means having had more restricted public finances as in any of the above mentioned reformers, but that was also praised as a booming and investment and business friendly country. Other telling fact is the lack of Romania from the classification, wich was again pointed out as a model for the reform laggard(s)... Maybe it would have been too much even for our experts to qualify Romania as having brighter outlook after the country registerd the largest contraction outside the Baltics?

Even more contradictory is the classification of the Baltics. For years those countries were considered to be among the most reform oriented, most business friendly ones with flat-tax systems and budget surpluses, low redistribution rates and social expenditures,* while Hungary as reform laggard - implicitly even in the above mentioned article - was criticized because of its "high" social spending. The fate of the Baltics, simply dosn't fit into the framework of reform countries having a good chance to emerge early from the crisis, and I'm convinced that it completely undermines the whole argumentation. Moreover the "experts" expressed their views that countries relying on strong export oriented industrial sectors will have an earlier recovery, due to growing demands in their export markets as the recession fades. But the reform laggard Hungary has one of the strongest export oriented industrial sector that in itself performed quite well even under the strains of the restrictive fiscal policy of the recent years, with huge growth rates in production and export as well. Why do these so-called economists think that Hungary's export oriented companies wouldn't be able to use the growing demand in order to expand their production, especially as the country's public finances are in a significantly better shape then two years ago? And why do they think that the Slovak industry relying heavily not on a differentiated range of products but on three car producing companies will experience a growth similar to the one seen in the last years? Can they ensure that the demand for cars will remain the same? Can they predict that consumers will have the same amount of money to spend and will look after the same goods at the same amount? I would call it voodoo economics rather than expertise... Or, even worth the complete incapability to pose the right questions.

The similar effects of the crisis in ECE and the contraction far worse then expected in countries earlier expected to fare better than "reform laggards" can be a sign - besides showing those experts in their completely miserable condition - that the very model of growth implemented in these countries after the change of regime reached its limits, especially as the integration of the financial markets deprived the fiscal policy from its means to controll and influence the outside flow of capital.

Despite the possible objections and the important questions looming over ECE even if "experts" do not dare to ask after them, they sole advice is to continue reforms. Although the crisis and the events in the Baltics even before, revealed that the economic model so wholeheartedly advocated was not capabale to fulfil any of its promises - sustained and fast growth, growing incomes at the individual level, fast real convergence to Europe - they are sticking to these ideas. Peculiar. And not only peculiar. Sometimes it is complete blindness. Nigel Sharing expressed his opinion that: "“The Baltics have proven that they are flexible enough to carry out these reforms and wage cuts. The only danger is that public pressure could grow due to the rounds of budget cuts.” But it s a contradictio in adjecto. If the Baltics already prooved its flexibility then no danger of the abovementioned kind should exist. If such danger exists then the Baltics has not proven anything of its flexibility. Moreover, the political developments - recently the Estonian coalition practically collapsed, the rightist parties look after new possible combinatitons, excluding social democrats - shows that the pressure is growing. Why not, one should ask? It is not only the course of events to be expected in an economic crisis, but at the same time reveals another important part of the problem. The much advocated model ensured fast growth - at least seemingly and certainly only temporarily - but at the cost of social cohesion, with growing inequalities. Why shouldn't societies opt for a moderate growth - especally as the sustainabilty of the 6-7-8-9% rates in the medium term are highly questionable, at least after the recent crisis' experiences - instead of a faster one menaing only real convergence to Europe only for the highest 10% or 20% of the respective societies. Sometimes there is a reason behind the development that the phrase reform is more and more despised in some ECE countries...

Oh, and the Slovak press was once again true to its traditions. The SME summarized the Reuters article with the following title
"Reuters: Slovaks made refomrs, Hungarians didn't. We can see the result" Yes, we can see. Slovakia is falling from a higher cliff into a deeper canyon?

*A recent rankings of competitivity of individual economies, based on the data from 2008 (!) provided by the IMD Business School ranked the Baltics still higher than the other ECE countries, despite a huge loss of position compared to the previous year....

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