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...

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