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.