Zoltán Pogátsa's blog on economics in English

Zoltán Pogátsa's blog on economics in English

Friday, 28 June 2013

No income convergence for Eastern Europeans

GDP per capita levels in CEE are famously converging to the West, so let us see whether living standards also are. As comparison countries in our limited experiment we have chosen Belgium, Austria and Germany, because they are not totally offshore tax havens (although Belgium and Austria show such features) or have rich natural endowments. Their climatic conditions are similar, and they are economically tied to Eastern Europe as dominant investors. From Eastern Europe we have chosen star performers Slovakia and Poland, as well as laggard Czech Republic. (No data available for the ultimate GDP sloth, Hungary.)

What we are looking for, are the nonessential income levels, defined as the remainder of the income left over for nonessential consumption or saving once we have spent on subsistance. The subsistance minimum is of course a difficult concept, but that is no reason why the EU should not have tried to come up with a harmonised indicator for it. Eurostate perhaps spent too much of its time on business related data, so there exists no harmonised European subsistance minimum. Eastern European national subsistance leves, around a €100 for parents in the Czech Republic and Poland, €140 in Slovakia, are so ridiculously low, they are meaningless. Whatever the methodology behind it, noone believes one can subsist with such wage levels.

So we have decided instead to take the Belgian subsistance level, €534 for cohabitating persons per person, and multiply it by the purchasing power consumption standard. (This procedure is likely to come up with a slightly lower figure than realistic, since the ppcs includes hotels, alcohol, and services that poor people do not take advantage of, but where the East-West price differentials are greater. But we shall disregard this.) By doing so we claim to arrive at a realistic subsistance level for these economies. Here is what we find.


Final primary income per inhabitant (on Purchasing Power Consumption Standard) in Slovakia increased from €5747 to €10583 between 1998 and 2008, in the decade before the crisis. The difference from Belgium basically stagnated (€9925 to €9764). Difference to Germany grew (€10576 to €11082). Difference to Austria grew (€10090 to €11684). A realistic subsistance minimum based on the Belgian methodology would be around €343 per month, or €4120 per year. Thus a typical Slovak would have around €6463 to spend on nonessentials, or save if she so chooses, the Belgian €13 939, which is more than double.


Final primary income from €5395 to €8763. Difference to Belgium grew €10277 to €11584, Germany €10928 to €12902, Austria €10442 to €13504. The realistic Belgian-based subsistance minimum for Poland would be around €286 a month, €3433 a year. This would leave the typical Pole €5330 for nonessentials. A Belgian has more than two and a half times as much.

Czech Rep

Final primary income grew from €7276 to €11076. Difference to Belgium €8396 to €9271, Germany €9047 to €10589, Austria €8561 to 11191. A Belgian-based realistic Czech subsistance mimimum would be around €367 a month, €4406 a year. This leaves a Czech €6670 of nonessential spending, about half of a Belgian.


Final primary income grew €3847 to €9233. Difference DECREASED SLIGHTLY €11825 to €11114. (Then Estonia crushed...), Germany stagnated €12476 to €12432, Austria €11990 to €13034.


No data for Hungary, but the country's wage growth has been so flat, it is not even looking into.

Monday, 17 June 2013

Was the welfare state unsustainable?

One of the most lasting achievements of the neoliberal hegemonic narrative is related to the “collapse” of the welfare state. It is now received wisdom that social welfare states had suffered from inherent problems that had to be ‘corrected’ in the eighties by 'sensible' neoliberal leaders such as Thatcher and Reagan. What is striking is how little these claims have been or are checked against reality. Doing so would reveal, before all else, that the decades of the welfare state produced higher growth rates and higher levels of employment than the following decades of neoliberalism. Significantly, the data also disproves the central tenet of the Thatcherite narrative, according to which the welfare state collapsed because labour had acquired overly strong rights, primarily but not exclusively in the form of trade union power, which it used to secure itself more and more entitlements. Through these entitlements labour captured a larger and larger share of total economic output in the form of ever higher wages and other benefits. As a consequence the profitability of Western European firms was squeezed, and the financiability of the welfare state came into question by the early seventies. (The Marxist version of this narrative would add that capital gave up the compromise about the welfare state as a result of the profit squeeze in the early seventies.)
As it happens, empirical data disproves this narrative. What we see from the data is that the labour share of GDP stayed constant or even decreased slightly during the welfare state decade. It then increased slightly in the seventies, a decade when five great crises hit the world economy: the first oil crisis, the Nixon shock, the abandoning of the gold standard, the second oil shock and the Volker shock. This was primarily caused by decreased economic activity (the denominator falling) and sticky wages (the numerator staying stable). From the early eighties onwards, with the onset of the neoliberal era we see a continuous and marked drop in the labour share of GDP.

In the case of the welfare states of the EU 15, we see an oscillation of the labour share of GDP between 70 and 72 per cent of GDP in the sixties. With the arrival of the crisis in the eighties this share increases by no more than two percentage points, then starts to decrease to reach a low point below 65 per cent just before the Great Recession of 2008. In the case of the US, which did not have a welfare state, we see a clear downward trend from 1944 onwards, albeit with some oscillation. The slow downward trend accelerates considerably during the Reagan, Bush Snr, Bush Junior and Obama presidencies, with somewhat of a reversal during the Clinton years. It is also visible from the data that there was no significant difference between the changes in the labour share of public and private employees. All in all, the welfare states did not go bankrupt because of a profit squeeze or the over-empowerment of labour. The narrative did convince some voters, and was used to curb and roll back trade union rights. With the gradual neoliberalisation of the left (Mitterand, Papandreou, Blair, Schröder) even the one time sceptics bought into the mainstream narrative.

Monday, 3 June 2013

Turkey: caught between modernisation in postmodernity and Islamisation in Islamophobia

The current crisis in Turkey was sparked by government insistence to build a mall, shaped as a one time Ottoman barracks, in place of the last remaining patch of green around Taksim square. Obviously, the government went overboard. When thousands demonstrate against change in the city landscape, you suspend the bulldozers, not shoot tear gas canisters at the protesters. Then hundreds of thousands went marching into the streets across Turkey, beating pots and pans,indicating that more was at stakes than trees.

The events arise from much deeper tensions within Turkish society. There are actually two Turkeys living side by side, mixed but apart, like oil and water. Ataturkists believe themselves to be westernisers and modernisers. They wish to join the EU, although decades spent in the waiting room of the organisation make it seem more like a living room. In fact it is clear Turkey will never be allowed to join, yet no one wants to be the first to say so.

Kemalism is not equivalent to a Western style democracy. Ataturk's rule was within a one party state, with a strong cult of personality, limited press freedom, and an overly strong military. Above all, its active secularism is not shared by any EU state apart from France.

It is intriguing that in a country where almost everyone is a Muslim, no Islamic party was allowed to exist. The AKP came very late to fill that gap. Had Kemalists been a little more accepting, the AKP could have become the functional equivalent of a Christian democratic party on a Western political spectrum. This could have made Turkey a model democracy for the other Muslim societies in the Middle East. Kemalists, however, stuck to active secularism. Of course the Islamophobia engineered by the United States governments did not help. All this made Erdogan and his party more radical. To be sure, AKP is popular: they have been reelected twice. The economic figures also look good on paper. The per capita GDP has been tripled over the last decade, although it is still only half of that of Central and Eastern Europe. In addition, regional differences are enormous. While Istanbul and the Mediterranean coast might easily be at around 80% of EU average GDP, in the Eastern provinces it is about 5%.

As a consequence, the enormous internal migration leads to overurbanisation, and the east and middle part of the country is emptying out. Most of the fast development is unsustainable. Istanbul has grown from a city of a few million to 18 000 000 inhabitants, although the authorities lost count at 12 million. (Similar overurbanisation took place in Ankara and along the Mediterranean coast.) Since figures are very unreliable in Turkey, it is difficult to tell how much of the GDP grow is highly unsustainable overurbanisation. The AKP has been balancing between traditionalist cultural policies and neoliberal economic policies. It has also developed a cozy relationship with major construction companies. Unsustainable bulding projects include a number of environmentally damaging dams in mountainous areas, highways in Istanbul, a third Bosphorous bridge, a third airport for Istanbul (Europe's largest), a canal to connect the Black Sea and the Sea of Marmara, and now the Gezi Park shopping mall.

It takes two hour to leave Istanbul by car, and about four to get from one end to the other. The city is a utopian urban jungle of fifteen storey housing blocks, highways and plazas. It is essentially the nightmare scenario of what happens when the developing the world begets a middle class similar to the west. Dirt, pollution, cars and concrete. Although unreliable official figures speak of low unemployment, it is impossible to know how many migrants really find work here. Only high end shops give you an invoice. Modernisation in the age of postmodernity.

Thus the difference between the two Turkeys is cultural. Erdogan wants a Muslim country, the Kemalists want a westernised one, As the case of the foreseen Taksim plaza shows, however, both sides are in the pocket, of the constriction industry.

Monday, 8 April 2013

Margaret Thatcher, the Mother of Our Neoliberal Crisis

(Source of article: Heterodox International Political Economy by Zoltan Pogatsa)

When Margaret Thatcher became Prime Minister of the UK 1979, she was the first true neoliberal in a major country of the world to be given a chance to implement the creed in practice. She was admittedly deeply influenced by Hayek, whom she held in a high regard, and was in regular contact with. A diehard crusader against communism, deeply committed to capitalism, she found Hayek’s ideas very useful in making her case. She was also a self professed monetarist, and while she duly respected Friedman, he featured much less in Mrs. Thatcher’s symbolism than Hayek, who had had much more direct a connection with Britain. Nevertheless she was a firm believer in the need for sound money, and tried to control the money supply in her initial years, until she realised it did not bring the desired results, at which point she refocused her attention to other axioms of the neoliberal dogma.
Thatcher believed firmly in reducing the size of the state, primarily through reduction of state expenditure. She was convinced that Keynesian solutions to fighting employment were in error, and the only way open for government to do anything about employment was to lower income taxes on the revenue side. This belief was latter coupled in her mind with the Laffer curve and ‘trickle-down economics’, both imports from Ronald Reagan’s America.
Perhaps surprisingly, Thatcher was initially not focused on privatisation. In fact she detested the word, preferring to use ‘denationalisation’ instead. What she did focus on, however, was the restructuring of state enterprises. Her predecessors had nationalised a relatively large share of British industry, and together with the state-led natural monopolies state ownership constituted a sizeable proportion of the UK economy. In these firms, but also in numerous privately run enterprises trade unions managed to acquire overly strong powers over time. This in turn led to over-employment, pay rises beyond business rationale, and as a consequence the loss of competitiveness for British industry generally. What Thatcher wanted to do first and foremost was to revoke these strong rights from the unions, opening the way to rationalisation of employment, technology and production. The curbing of union rights and the resulting heavy loss of jobs of course meant open and violent confrontation with them, as emblemised by her clash with union leader Arthur Scargill and his miners.
Initially the intent of the Thatcher government was to denationalise only a rather limited share of state assets. It was during the process really that her government realised the full political potential of privatisation. Shares of state firms that were to be privatised were more often than not undervalued in the initial public offerings, which made them very desirable, as their price was bound to increase as soon as they were released and bought. Thatcher justified this by claiming that even if this were the case, it was still worth it to take unprofitable companies off the books of the state. While this was true, it has also often been suggested that it was not so much private ownership that later made these firms profitable, but the fact that they were to face competitors. Thus by the time they had been restructured in order to be privatised, they were already able to perform in an economically rational way, were they provided competitors, with or without eventually ending up in private hands. A more formidable form of opposition to the privatisation process came from within her own party. The former Conservative Prime Minister Harold MacMillan famously likened privatisation to the ‘selling of family silver’, a quotation that has resurfaced again and again wherever and whenever state assets were being sold.
Privatisation in manufacturing, transport and telecommunication was a logical precursor to the deregulation of the British financial sector, known generally as the Big Bang, which entailed freeing up financial services to foreign firms. Deregulation opened the way for the City to become one of the key financial centres of the global economy, shifting the core of the British economy from obsolete manufacturing to a heavy dependence on financial services which was to have an unequal effect on the UK geographically for decades, and eventually lead to a major collapse after 2008 with the emergence of the global financial crisis.
A key area of privatisation by the Thatcher government became the housing stock of the local councils. On the one hand it was very popular with the Brits, who have a higher tendency to want to own their flats than their continental counterparts. On the other hand it radically widened the supporter’s base of the Tory party in those years. Margaret Thatcher used to think of and refer to home owners as ‘our people’, and she was likely to have been right.
The initial years of Thatcher as a monetarist Prime Minister were a spectacular failure. They were unable to control the money supply (LM3), their most symbolic policy objective, and inflation increased. Many Keynesians argued at the time that had the government been able to control M3, the resulting squeeze would have made the recession ever deeper.
There was proof that inflation was not ‘always and everywhere a monetary phenomenon’. In their first budget, faithfully to their creed, they lowered the standard rate of income tax from 33 to 30 pence in the pound, and the top rate from 83 per cent to 60. The loss of revenue was counterbalanced by a doubling of VAT revenues, which clearly had the immediate effect of raising inflation radically. It doubled from 10.3 per cent to 21.9 per cent in a year. The creation of a single VAT rate also eliminated the possibility of making use of this tax for something it easily lends itself, differentiated taxation in order to guarantee contributions from richer segments and to favour poorer ones. This, however, was never the goal of the conservatives naturally. It is important to stress, however, that unemployment also did not decrease as a consequence of income tax cuts. In fact it continued to rise for long years ahead.
At the end of her first term Margaret Thatcher stood to lose the election with the lowest popularity rating of any PM in history. However, she was saved by the somewhat bizarre incident known as the Falklands War. In this rather strange conflict she gloriously saved 1800 British subjects from becoming Argentine citizens on a small and barren icy island that her husband afterwards dubbed “miles and miles of bugger all’ upon visiting. She inflated the defence of this awkward remnant of British colonialism 8000 miles from Britain, dependent on the British taxpayer, as the frontier for rolling back aggression and standing up to the defence of the free world. Her ‘Lilliputian war’, as her biographer John Campbell calls it, cost her Ł3 billion from the national budget. Hardly a case of prudent housekeeping, but strangely it did have the amazing effect of uniting the previously hostile British public behind her ‘Churchill like’ war leadership. Ever since, the phenomenon of a political leader trying to reconquer popularity through going to war has been referred to as ‘the Falkland effect’.
Eventually economic recovery did arrive in the second half of the eighties. It is to this part of her governance that her supporters point to as proof of the eventual positive effects of Thatcherism. It came to be known as the ‘Lawson boom’, named after Nigel Lawson, his very talented Chancellor who presided over this period.
The most obvious reason for the Lawson boom was the fact that by this time the world economy had climbed out of recession, and there was demand overseas for British products and services. Clearly, there were healthy domestic elements in the boom as well. After years of intransigence, Mrs Thatcher finally forced the way open to restructuring of obsolete and overly expensive British manufacturing. This resulted in a heavy loss of jobs and output, and eventually in the complete disappearance for instance of the British automobile industry, but in the long run it is hard to argue that it was necessary and had a positive effect. The switch to a heavy dependence on finance is much more questionable. As it became obvious by the 2008 global financial crisis, overly deregulation in the financial industries brought with it an enormous potential for bubbles, unfair business practices and collapse. Financialising one’s industry is also an economic policy that cannot be repeated elsewhere. The global economy only needs a handful of global financial centres.
The Big Bang of the financial Sun, the City, was followed by the development of a string of tax heaven Moons around Britain from Guernsey through Jersey to Belize, the Cayman Islands and the Isle of Man. They represent an exploitative and unfair way of conducting international finance, and are far from being insignificant in size.
The explosion of credit also helped fan the boom, both in terms of national borrowing and at the levels of households. The latter took the form of both mortgages and the expansion of credit cards. Strangely, Margaret Thatcher always had a soft spot for mortgage owners. Rather than leaving her much lauded market forces to be at work, she could not be convinced to scrap the tax relief for mortgages throughout her years in government.
Another factor that is likely to have contributed to Thatcher’s economic success was the discovery of North Sea oil. The UK became a net exporter of oil from June 1980 onwards. In her initial years this boost was covered up by the fact that there was a worldwide recession, but later, as production increases, oil became an important factor. As Paul Johnson famously asked:
“…Who was it who had said that an oil well (or two) is a girl’s best friend?
Naturally, large scale privatisation deals also provided the government with windfall revenues that helped to balance the books. The top one per cent of income earners in Britain doubled their share of national income from 6.5 per cent to 13 per cent from 1982 to 200563.
As neoliberals since Mises and Hayek have prided themselves presenting the free market and liberal democracy inseparable, it is interesting to see how they fair in practice. While it is unquestionable that Mrs Thatcher was a leading crusader in the fight against communism, her record in other parts of the world is more questionable. She famously refused to introduce sanctions against South Africa, for instance, recognising fully that Britain had much stronger business interests in that part of the world than other nations for whom it cost less to quarantine the Apartheid regime. In fact she even went as far as to liken the ANC and its leader, Nelson Mandela, to terrorist organisations such as the IRA or the PLO. She read their commitment in the Freedom Charter to a more just and equal society as a sign that they would introduce a Marxist regime after and eventual regime change which she knew to be inevitable.
She was also an active promoter of the British arms industry in her bilateral meetings, realising the contribution of these firms to British output and employment. There were a number of very embarrassing cases during her rule, most prominently the excessive amount of arms sales to Saddam Hussein directly and through Jordan, in spite of an international ban that Britain had also signed up to. Most memorably, she called Augusto Pinochet, convicted for crimes against humanity, her friend, and visited her a number of times during his exile in Britain.

Performance of Reagan's America and Thatcher's Britain compared to others

Wednesday, 3 April 2013

Might Slovenia or Slovakia be the Next Cyprus?

Two Cypriots: "Have you withdrawn your money from your bank?" "Why panic? Tommorrow is another crisis day..."

Now that Cyprus has joined the PIIGS countries as the latest victim of the euro crisis, many people are asking whether Slovenia or Slovakia could be the next? Another way of formulating the question: if it is true that Greece and Cyprus went under not so much due to their own fault, but because of the low interest rates of the eurozone, why did this not happen to the Eastern European euro members? Or did it?

Well, in the case of Slovenia, it did. The tollar was fixed at a low inflation rate in the ERM antechamber of the euro right after the 2004 accession of the country. Centralised wage negotiations, previously characteristic of Slovenia, were abolished in 2006, and the wage repression of the preaccesson period turned to its opposite. Increasing inflation and low nomina euro interest rates lead to low, sometimes negative real interest rates. This lead to an artifical boom much like in the case of Greece or IReland. The current account deficit was not counterbalanced by foreign direct investment (FDI), since Slovenia is not an FDI based economy, like the former Soviet Bloc, but a German/Austrian type Rheinland Model economy, privatised to domestic owners, still holding on to considerable state ownership. A successful corporative economy. As I have elaborated elsewhere, it is the only former Socialist country that has absolved transition successfully.

The situation in Estonia was similar. They introduced the euro years later, but having operated a currency board, the fixed euro echange rate essentially imported all the problems of the Eurozone. Real interest rates turned negative, a bubble was formed, followed by horrible collapse.

Interestingly enough it was only Slovakia that managed to sail the stormy eurozone waters without collapse. But why and how? Partly because Slovakia introduced the euro relatively late, and her autonomous monetary policy gave her room to manouver. When they finaly did introduce it, Slovak wages were kept at an astonishingly low level. Of all the countries in the EU, Slovakia has the wages that are the furthest away from what productivity would warrant. In fact they could have double the wages they actually do. To put it crudely: Slovakia managed to avoid the negative side effects of the Eurozone by staying poor. They avoided inflation, thereby low real interest rates and the bubble. In addition, they joined the euro in the midde of the global downturn, with relatively high unemployment rates, and therefore there was no pressure on wages to rise.

They deserve a wage rise badly. HOwever, they will need to deliver it gradually if the want to avoid being the last one to fall.