On the paradox of sovereignty

There should be nothing surprising in the Hungarian governments reluctance to accept the terms of the EU and the IMF for a new agreement, at least for those following the developments in Hungary. The EU insists on repeal of some recently passed legislation, while the IMF made very clear that there is no way Hungary can hope for anything else than a stand-by-agreement with hard policy conditionality. A detailed action plan, quarterly reviews, and again reinstatement of the fiscal policy framework dismantled  in the last twenty months. At least for the time all of this is unpalatable fro the Hungarian government - despite signs that they are trying to conclude their separate pact with the IMF with or without the Eu's blessing. (The government announced the chief of the Hungarian delegation will visit Washington for informal talks next January in order to meet with IMF general director Christine Lagarde, other directors and the staff responsible for Hungary, but there was nothing about reestablishing contact with Brussels and the EC.)

The reason behind this reluctance is - besides underestimating the risks most probably because government politicians are eyeing the reserves of the Hungarian National Bank as a source of liquidity that can enable the country to weather the storm until growth resume - a deeply seated desire for sovereignty. The conflict - fashioned as an economic war of liberation or independence - is about Hungary's ability to conduct its self-styled policies. One can argue - rightly - how short-sighted this old-fashioned concept of sovereignty is today, discuss how impossible is it nowadays to dissociate one country from the world, or point out that even the giants of the world are steering towards forms of collective world governance, even if only out of necessity. But the Hungarian situation conceals far more than a simple arch-conservative or super-traditionalist understanding of sovereignty. It is deeply paradox.

The government struggles to establish a precautionary or flexible credit line with the IMF, something they phrased as safety net or insurance, an agreement providing IMF money almost unconditionally in case of necessity - in the name of economic sovereignty. They reject conditionality because it would grant supervision over Hungarian policy decisions for a foreign institution.  However, one and a half years ago, at the wake of the previous IMF program everyone expected the parties will to arrange for exactly the same type of agreement. Then the Hungarian government suddenly disrupted the negotiations, after some days of hesitation and confusion announced the war of economic liberation on the IMF and proceeded with her unorthodox measures designed to resolve the problems that the IMF program was intended to resolve. It seemed the IMF won't ever return and sovereignty is regained successfully. Only one year passed and the necessity of a new understanding with the IMF seemed inevitable in order to avoid the worst. But - directly because of the disruption the government inflicted upon the country - the government has a very slim chance to get the desired flexible credit line. The one they would have easily got before the war started. They would have now their beloved sovereignty without the war. But the harder they fought for it the farther it slipped away...

P.S. Actually, if one looks after a similar concept of sovereignty there is one handy parallel in the neighborhood, albeit from some decades earlier. The Romanian government - not independently from the very strong nationalism in the country - thought of and acted similarly in the international community since 1918 and until 1989. Surprisingly their fervor for sovereignty somehow abated in the last decade, or at least they have learnt how to manoeuvre.

Frustration, failure, voluntarism

Hungary is still only a secondary front-line of the renascent crisis, not among the headlines and for a superficial observer (i. e. for most of them) it could seem justified. Although the slippage in this years budget (and the obvious: the flat tax was not capable to stimulate growth) could warrant some worry, the government is imitating action at every negative sign, this time announcing 100 billion HUF correction measures. Hardly credible (enhancing tax collection makes 40% of this amount, and a freeze on government purcheses another 40%) and hardly structural, but it didn't really disturb analysts. Not even the news that the execution of the Széll Kálmán-plan (the bouquet of austerity and supposed reform measures planned to bring 550 billion HUF savings next year and about 900 billion until 2013) suffers from serious slippages, and exactly at those fields from where the government expects the highest savings could shake the belief in these guys. They can at last claim that the government is devoted to the deficit figure and ready to apply new measures if necessary. (I would really like to know how long would they bosses at their banks tolerate if they would announce that they had managed to failed to achieve the planned profit in the first eight months of the year, but they are very committed to the planned number and are ready to make corrective measures.) Anyway, it was hardly the sensation of the week, especially in the light of the government's even harder commitment to the flat tax.

But the end of the week brought back the memories of last year, when hardly a week passed without events and announcement testing everyone's heart and patience. It turned out that something was cooking (besides the books) in the witch's kitchen run by the government, a new plan to save the fx-loan holders.

Well, the malicious will certainly point out that as a complete program with this aim was already implemented and started two weeks ago it was even more short-lived than this year's budget, another object of pride of the government. But as one of the reasons the government came up with this new idea was the not qiite spectacular success of the original program (there was no opportunity to show long queues, praising the government in the TV) it is worth to be mentioned. The other reason behind the new plan – at least in my opinion – is the complete failure of the flat tax and the resulting frustration with the economic policy. I'm sure they attribute the lack of internal demand not to the fact that the new tax system was a tax hike for most of the population and it favored the segment with the least marginal propensity to consume, but to the spiking mortgage rates due to the CHF based loans. I fear it is telling regarding the mind-set of the government that facing the obvious collapse of the whole of their economic governance they decided to stimulate their original stimulus, instead of changing the pattern of redistribution. (Furthermore, they will cement in this tax system with a two-thirds majority law.)

What is the problem with the proposal? Firstly, it is its aim: to „release” the income of households in order to make them spend more on consumption. Secondly, the set-up of the plan and the parameters applied. Not only is there a few evidence that the weakness of the forint was the main reason of the weakness of domestic demand* but it fails to address the major problem caused by the fx-loans: the effective fixed excahnge rate of the HUF. As long as hundreds of thousands has fx-loans the country can not devalue because it will immediately harm, cause pain to millions. But external devaluation would improve export competitiveness faster and with less pain (mainly thorugh import generated inflation) than the internal devaluation (austerity) executed by Fidesz. However, the government only hopes to bring redemption to a quarter of the 1,2 million households with fx-loans with their plan to enforce a conversion of the loans at an exchange rate of 180 Huf (50 forints weaker than last Friday's close), signaling that they do not really want to get rid of the effective peg in order to curve out more room for manoeuvre for the economic policy, but to fend of the popular pressure.

As for the second problem the plan lays the whole of the burden and the losses on the banks. However, the balance sheet of these banks is already full of hidden losses due to the non performing loans and the loss of value of the real estates serving as collateral fro these fx-loans. As long as they can keep their debtors afloat they not necessarily can declare these losses and they can manage „only” with setting up appropriate reserves. So, they can hope – and in this sense their interest is common with their debtors' interests – that at the end these loans will be payed back according to schedule and they can release the reserves set up to cover projected but at the end avoided losses. However, as soon as they are forced to accept the conversion of these loans (or the repayment in one sum) at 180 HUF exchange rate they will realize huge losses on these loans that has to be covered. According to preliminary estimates it can be as high as 1100 billion HUF. It will effectively force them to recapitalize. Even if their owners (Western Banks mainly) will provide them with the necessary capital – that is far from being certain – they will certainly try to find as much foreign capital as they can for this purpose. One option is to freeze lending and use the capital to cover losses. And on the long run they will certainly pay close to zero rates on deposits, as they won't need to accumulate capital this was because they won't lend. (There is of course the secondary effect of losing confidence in Hungary. As this move would be most probably illegal, violation of existing contract by a third party without interest in these contract, violation of property right and that way unconstitutional and against EU law if the government implement it it will be equal with the declaration that no investment and no property – remember the private pension funds! - is safe here.) Anyway, it could bring the banks to the decision to withdraw – gradually or even abruptly – from Hungary. It will certainly cause further reduction in lending and tighten already very tight financial conditions. And such events are rarely beneficial to economic growth, something the government desperately wants to deliver.

As the plan is clearly not part of a coherent one on how to free the Hungarian economy from constraints from which it can be disentangled it is hard to see how it could lead to positive result. It is not aiming to the solution of the most important problem, just for short term political gains. (And it is the expression of frustration as the information on the discussion in Fidesz's caucus suggest. The most important supportive argument against the objections of the more restrained members was that the banks caused this whole mess they should bear the whole of the burden.) Not that there wouldn't be place for an orderly and well balanced solution to the problem. There were even plans proposed by bankers. And even if those were rejected with the cooperation and advice of the IMF and the EU (and with their loan) a kind of bad bank or special financial vehicle could be set up in order to clear the bank's balance sheets, convert the loans and that way achieve simultaneously the re-ignition of bank lending to the economy (that was already constrained by the huge implied losses and the subsequent frenzy to collect enough capital to cover these probable losses) and the lifting of the burden of households. But it would obviously end the economic war of liberation so proudly waged by the government.

*According to the data of the Office of Statistics retail sales grew in this year m-o-m and y-o-y as follows:

               m-o-m        y-o-y

January     0,9% and   0,9%

February -0,3% and   0,1%

March     -0,5% and -0,9%

April       -0,3% and -1,2%

May         0,5% and   0,7%

June        -0,5% and -0,5%

Meanwhile the CHF-HUF exchange rate fluctuated between 220 and 205 HUF in January, between 203 and 214 HUF in February, between 201 and 214 HUF in March, between 200 and 210 HUF in April, between 204 and 221 HUF in May and between 214 and 228 in June. Funnily, retail sales declined in the month when the CHF was weakest.

Scholars of humanties will save the world?

Yesterday - at least as I see, without any qualification and only intuitively - was a fine example how the psychology of the markets work. At the start almost every stock exchange plunged, almost a free fall, but they soon began to recover, most probably on the back of expectations that the FED will announce new measure to boost the sluggish US economy. The expectations ranged as far as the immediate announcement of quantitative easing adn what happened? Well, nothing. The FED reiterated that they are aware of the problems, just as they were earlier, they will keep interest rates practically at zero, just as it was for a while, they will pump back their profit into the financial system, again as it is happening even now, and of course they will consider anything that can help the economy. None of these measures helped to stop the deterioration so far, and to expect a different outcome for now would not be too logical. An none of these measures is new in any sense, not to speak of being surprising. Or did anyone honestly expected the FED to raise its rate in the face of the slump? (Just because today's hedalines speak of markets rebounding due to FED's announcement of keeping rates zero.)

Thus, the FED did not change course, while the markets were expecting something new, that could steer the world economy in another direction. The initial reaction were as one would expect: sell-off at the stock exchange. But, curiously, after some time euphoria settled and the markets rallied. Given what happened it is counterintuitive at best.. Market participants were waiting for the announcemtn of radical changes and what they receieved was the announcement of no change at all. Initially they reacted asthey should, but somehwo reconsidered their position and began to trade like the FED would have given them what they had expected. Instead of the usual market-bashing probabyl it is better to draw some conclusions.

It is not words that matter - sometimes instead of deed - but only how they are interpreted by actors on the market. Even if what they have heard was the opposite what they longed for they could still reinterpret it as if it would be the much desired news. But there is still a delicate case here: it seems words of financial institutions are more or less unintelligible for their audience and it confuses them, This time for the better - leading to positive evolution of the market -, but it can easily turn out to be the opposite. And this is the point where scholars of humanities could have a significant role in ameliorating of the workings of the economy. Who else are in a position to make a thorough textual and discoursive analysis of the words of financial institutions. Probably with a wide scale reserach project every statement and every interview of the respective central banks and their leaders should be collected and alaysed in order to determine the real meaning of words and phrases. And as personalities in the financial world change it would be a never ending story. But with the help of these scholars the markets would have a dictinoary or theasurus of the central banks enbaling them to undertsand their statements immediately. Funny, it seems the markets needs translators and they will collapse without the help of those useless humanity scholars.

August again, leaders on holiday - what about a new Marshall-plan?

Not that it would be a typical one, with almost unbearable heat, slowly radiating from the walls of houses and even the shade of trees not offering relief without the breeze. And I don't believe in theories that for some mysterious reason August would be a month dedicated to and the most suitable for catastrophic events to happen. But after another half a year of "it is a strong recovery, fundamentals are OK, everything will be perfect, only those profligate Greeks should make themselves more accommodated to the inevitable decline of their living standards and work more" narrative suddenly the whole world seems to accept that we are on the verge of absolute collapse and disaster. (So much for the rationality of markets. ;) ) Well, according to the most capable economic leadership in any country of the world Hungary is a safe haven, China will defend it from anything that would happen. But otherwise, the world is doomed. (Just look at exchange rate and the bond yield curve of the last days, no sign of Chinese buying Hungarian debt at least not with discount.)

In a sense it is undeniable, but - I hope for many - not exactly the events are the most worrying, but the apparent lack of any kind of leadership and ideas, what to do and how to act in order to avert the worst. What we only have is a renewed argument whether neo-Keynesians have it wrong or not, whether we should eliminate deficit now and at once or not, whether tax cuts will bring the so urgently needed growth. But as the events unfold no one seems to make an attempt to exert control over them. Those, who are supposed to be leaders, are just gaping at the incoming storm. However, even if sometimes the situation seems to be the contrary, it is lack of invention and new ideas that lies at the root of the sudden outburst of the crisis, everyone hoped (and thought) to have buried very deep. As the debates show the faith in the capacity of the states to act is shaken but there is no other entity to turn to in distress. To leave it for the market is a good idea but it would surely be suicide. Sovereig default would certainly bring down banks and companies, wiping out their - real or imaginary - wealth and resources, and of course individuals too, leading to the - at least temporary - death of those very markets we should turn to. The markets would like to see the states resolving the crisis, but abhor from most of the solutions offered. As long as the present crisis is seen singularly as a competitiveness issue - and not a lack of sufficient demand in the world- the markets will demand more and more austerity, leading to even less demand and so on. It is certainly a delusion from the recovery that the possibility of growth is associated exclusively with competitiveness as if Say's law would be unconditionally true. Despite the fact that in the light of recent revelations the performance of some economies in the last more than one year was probably driven by Chinese and US quantitative easing, creating a favorable environment at the emerging markets. Probably it is really not so easy to accept that extreme high German growth was not something given because the Germans are industrious workers but because there was demand somewhere for their products. (Even if the significant slowing in the last months would suggest otherwise.) The problem is that as long as the demand side is not really taken into account no one is really ready to accept: austerity might bring about the classic deflationary spiral.

Furthermore, the addressing of the international imbalances, the rebalancing of economies has not even begun. Even in Germany with its vigorous growth internal demand remained suppressed, and show only modest strengthening, while the German industry  has till not reached its peak output before the crisis. Not to speak of the other major and minor economies. According to the last IMF report on China even the authorities accept the necessity to direct the country to a more balanced economic model, with better social services, comprehensive pension and health care system, cheaper social housing, all costly and serving as automatic stabilizers but hopefully enhancing internal demand - for imports as well. With the turnaround of emerging economies the developed one could probably better rely on external demand, making plans of debt reduction based on exports via growing competitiveness more realistic, and not only them: there is the Eastern periphery of the EU too. Anyhow, one thing is clear: reform and spending cuts are no quick fix for the problems and even if there would be capacity and determination to implement them at once it would need a lot of time to change the course of those economies and generate growth that would make debt reduction credible.

Unfortunately there are complementary problems concerning the possible resolution of the crisis, structural ones but this time not on the labour market nor in the tax system, but at the very heart of economic governance, and well beyond the all-too-known issue of the Eurozone being a monetary union without a fiscal one. These structural problems mean serious constraint on the possible path of action for politicians and central bankers and accompanied with the lack of imagination makes the successful escape from the crisis one of the least possible outcomes.

The classic panacea for debt is threefold:

- faster growth

- austerity

- inflation

and these are often interlocked and interwoven.

The austerity is only viable in a benign and favorable international environment; when growing export markets offer a substitute for weakening internal demand fast enough to avert a long lasting economic slump. In case of an independent currency the fastest and easiest way is devaluation, otherwise harsh cuts in production costs are needed (and austerity to make it credible that the declining budget revenues won't lead to soaring deficit) and thus the restored competitiveness would enable producers to outbid their rivals. However, at the end the whole process could turn out to be a classic beggar-thy-neighbour policy, reducing cost in competition forcing others to do it and making gains in export at the cost of others and not as a result of a expansionary economic environment.

In order to avoid such successes being short-lived sustainable faster growth at the end needs more demand from somewhere, therefore the first option is very much constrained by the international environment again, if there is no opportunity to generate internal demand. Thus the present economc situation  is anything but favorable to these options: no chance of a devaluation as it is either impossible due to the lack of own currency or due to the practical peg in currencies of countries where significant part of individual, corporate and state debt is foreign currency denominated. And with a markedly slowing world economy - according to some it is almost certainly will be in recession in the second half of the year - there is no internal demand to rely on while austerity wipes out internal.

There is of course the third option - inflation. Most of the debt problems in the last century (actually even before that) were eliminated with this option. Whether it is fair or not, it is an effective way to reduce debt-to-GDP ratio and reduce the value of claims on the state and on the individual as well. Not inflation indexed debt will soon lose its real value when facing 4-5-6% or even higher inflation with negative real interest rates. The problem here is twofold: without the chance to devalue (that is inflationary per se) it can only be achieved by issuing money (and/or directly monetizing debt). But money issuance is usually the privilege of Central Banks that are independent of government, exactly for this reason: not to let the latter monetize their debt and inflate away the problem. 

There are of course psychological factors here in play too. Many fear - and it is not unjustified - from high and protracted inflation as it can be very destructive and usually distributes the burden unfairly across social groups. Furthermore it can push upwards bond rates, just aggravating the sovereign debt situation, making the financing of a country more and not less harder. And there is the much dreaded phenomenon of stagflation, when inflation fails to bring growth and while prices are soaring, the economy still flatlines. So, even if it can really offer a solution - as recently the IMF's chief economist, Olivier Blanchard suggested - it requires desperation and leadership and it can probably achieved only at the price of giving up ideas like the independence of central banks. (As it would need the revocation of their independent right for setting rates and issuing money. But as an ultimate solution at the edge of complete disaster it is still an option - an option that also needs time, at least a bill should be passed in parliament.)

There is of course a substitute for inflation, implemented in the last years too, quantitative easing. This time the central bank pumps money into the financial sector, either buying assets - sovereign bonds etc. - at the market. It is presumed that this money will find its way to companies who want to invest or to individuals who will spend it, because the more money is circulating in the system the less constrained are the banks to lend them. (In a sense it is again Say's law...) Sometimes it works, but in the last years it only had some unintended consequences and perverse effects: a rally at the emerging market stock exchanges and soaring commodity prices, at the end not enhancing the capacity of individuals and companies in the respective developed economies to spend more, but reducing it. The problem lies in the method of pumping the money in the system: through the intermediaries of banks. For companies, As long as demand is sluggish and existing capacities are underutilized (which is certainly the case now, when even Germany has not reached its peak output again) this is just cheap money to reinvest in financial assets (or in cae of a tax cut it is just additional profit).For the individuals this is not necessarily welcome. Those, who are deleveraging (i.e. paying down their debt) the main concern is not how they could take more debt on themselves, but how they could earn more money to pay their monthly rates. (And again: if it would be a tax cut, it would most probably be spent almost immediately on existing debt.) But the main problem - especially in declining economies is to produce something and sell it. (However, it also can be a problem for a rebalancing economy. For example if the US would need to export more and import less in a drive towards a more balanced economy then they also would need to produce something and sell it.) And the main reason they are not doing it is lack of sufficient demand: there are still underutilized capacities, internal demand is suppressed by austerity, external demand suffers from the end of cheap money at the emerging markets and consequently from the slowing of the global economy. So, the task for politicians and economists is twofold: they must ensure that money pumped into the economy is used to purchase - in a very broad sense - additional products in order to make output growing. And the main obstacles they have to face are: fears of sovereign default even in case of economies with an own currency (thus there is no room for fiscal stimulus); and fears of inflation (thus there is no room for monetizing debt).

At this point I’m not claiming that I would be more imaginative than our leaders. But reading Tony Judt’s Postwar made an embryonic idea growing in my mind. If states need to circumvent the obstacles of the markets who perceive every non-conventional action to lift internal demand as dangerous, while conventional action accepted by the markets was proven ineffective then what to do? It is clear that somehow money should be given to companies in order to make them produce, to individuals in order to make them buy goods… Actually something resembling of the post-war Marshall-plan can be a daring attempt but maybe not doomed to fail.

In case of the Marshal-plan goods from the US were transported to the participant countries according to their wishes that were based on plans. These could be consumer goods, investment goods, commodities etc. Usually the US delivered and paid for it, from its own treasury and the receiving countries used them. Either fed the population or built up infrastructure or plants etc. But it always created second tier effects in the receiving countries while it pumped money into US companies – who otherwise would have to face the rapid decline of military orders. Something similar could probably allow distressed countries to invest (in plants, infrastructure, services, human capital, education etc.) and thus generate not only income for their population but lay the foundations of later exports and ensure a healthy level of new orders for companies in the donor countries. (The Germans are planning something on a much lower scale in Greece, but with not much haste and with too old-fashioned methods: offering investment chances for companies.)

There are of course risks and institutional problems as well. Everything should be well-planned and at least moderately effective, i.e. there is no room for huge misallocation for investment, a reason to implement good planning, just in case of the Marshall-plan. Furthermore, few states can be the donors directly, as it would only make their debt grow. But there are ways to bypass these last obstacles. Not only would it be desirable to extend the program to the world (as a means to help addressing international imbalances and rebalancing of economies) but it would distribute the risk very broadly, Furthermore, there are institutions in the world system and in the EU that could implement such a program: the two reconstruction banks, World Bank and EBRD. For example if the EU would decide to issue Eurobonds – and they wouldn’t immediately pass on the money raised to distressed countries – they can place it into a huge reconstruction fund and finance the new Marshall-plan in Europe. They have to capitalize with it the EBRD and then let them coordinate the planning. afterwards the Germans and French can deliver the goods – paid from the fund - to the Greeks, who could earn their wages while using it or selling it or buying it… And the money would at least cover one and a half transaction and not immediately sucked up outstanding debt.

It is far from being an easy and elegant solution and it would still require a lot of human effort. It depends on the capacity and ability of a lot of individuals. But at least it offers the elimination of the main obstacles in the way of a lasting solution and addresses a real problem and not an imaginary one.

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...

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?)

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...

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.

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.

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.

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....

"I was not lying, I'm only idiot" - scene two of the teachers' salary saga

The story of the law raising teachers' salaries in Romania rolls on. The president, Traian Băsescu, after admitting a mistake yesterday was possibly warned by his spin doctors that it is dangerous to assume responsibility. As a consequence, at the evening he began to manouver in order to put responsibilty on anyone else. According to his new explanation it would have been strange not to promulgate the above mentioned law - even though the government insisted that it is practically impossible to realize, or only with a serious imbalance of the state houshold - while the National Statistical Office and the IMF predicted economic growth for Romania for 2009.

Apart from the usual deception in political communication one can once again highlight the fact how the idea of exceptionalism and singularity prevailed and prevails even over common sense in ECE. Although many "anaylsts'" forecasts ultimately turned out to be quite far from reality, to accept the idea that a country in wich growth depends on consumption based on the money sent home by guest workers in countries heavily affected by the crisis (Great Britain, Spain, Italy!) and on a housing bubble - a classical one, an appartment in a block of flats in Bucharest, built in the '50s was more expensive then a newly built flat in one of the most prestigious areas of Budapest - would not be influenced by the world ecenomy's events was simply idiocy, even if it was shared by so called experts as well. And it was clearly not independent from the fact, that it was tempting to use as a political leverage the fact that the countries seemingly hit by the crisis was "arch-enemies" of Romania and in this sense falling behind the own country, reinforcing the feeling that everything goes right in this state.

Practical jokes of life - Retributions in Moldavia

In an earlier post I tried to express my views on the situation in Moldavia. Although the process of retributions and the consolidtaion of the situation of the present government continued, the news consisted some very peculiar information, some of it seemed as a farce of the political forces in power. The government, two or three days after the riots, announced that they arrested someone accused to be one of the organizers and initiators of the events. The published name was quite capable to reinforce every kind of suspicion regarding the government's intentions. Who would think that arresting a man called Johnattan Jerusalaim Netanyahu could be anything else than a preparation for a fake trial? Jews have an age old tradition in the area being scapegoats for every problem and this approach didn't lack from the practice of communist parties in the Stalinist era. But the tranquility of those, who thought of it only as a usual manipulation of the well known communists have been disturbed soon. The authorities revealed that the above mentioned American-Romanian citizen is nothing else then a priest of the Moldavian orthodox church. I could not have helped to laugh for a while...

(In some christian churches giving and using names from the Old Testament is a custom in order to express adherence to the real traditions of christianity.)