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.)