Greece and Latvia (in Latvian)

Written on November 8, 2011 by Jānis Bērziņš in Janis' opinion, Latvia

My comment on Greece and Latvia I wrote last Thursday and “Diena” didn’t publish:

No vienas puses no parādu viedokļa Latvijas un Grieķijas situācijas ir ļoti atšķirīgas. Grieķijas parādu lielākoties veido valsts parāds valdības obligāciju veidā – kopumā 350 miljardi eiro un šīs obligācijas galvenokārt pieder Francijas un Vācijas bankām. Grieķija ir Eirozonas locekle. Visbeidzot, grieķi aktīvi piedalās protesta akcijās, tādējādi izdarot spiedienu uz politiķiem un liekot viņiem vairāk pārdomāt savus lēmumus. Saliekot šos visus punktus kopā, ir redzams, ka Grieķijas bankrots skartu visai daudzu pušu intereses, taču tanī pat laikā ir spiediens cīnīties arī par labākiem aizdevuma nosacījumiem. Latvijā ir visai atšķirīga situācija. Mūsu lielākā parāda daļa ir privātā sektora parādi un konkrēti Skandināvijas banku parādi. Latvija nav Eirozonas locekle un visbeidzot Latvijas cilvēki neprotestē. Tā vietā viņi pamet valsti. Tātad pie mums nav politiskā spiediena politiķiem cīnīties par labākiem aizdevuma nosacījumiem. Viņi ir priecīgi atmaksāt naudu SVF un Pasaules bankai un tā vietā aizņemties no privātā sektora. Un te nu rodas problēma. Tā kā Latvijai līdzīgi kā Grieķijai ir visai augsts korupcijas līmenis un vāja nodokļu iekasēšanas sistēma, kā arī tādēļ, ka valsts parāda palielināšana ir salīdzinoši vienkāršāks risinājums par reālām strukturālām reformām, tad pastāv liels risks, ka Latvija nonāks Grieķijas situācijā. Mēs vienkārši palielināsim valsts parādus līdz līmenim, kurā vairs nespēsim to maksāt, apgalvojot, ka esam veikuši taupības pasākumus līdzīgi kā to darīja Grieķija.
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Dombrovskis’ Plan: Some Remarks (in Latvian)

Written on November 4, 2011 by Jānis Bērziņš in Janis' opinion, Latvia

I’ve sent these comments to Vienotība’s (my party) guys controlling the economic ideology, including Valdis Dombrovskis. Only one guy answered, thus I assume the message behind the lines is “Thank you for contacting us. Your comments are very important for us. You don’t need to contact us again. We’ll keep in touch.” These comments are superficial, as the plan itself is superficial. There is much more to be written and said about development in Latvia. The fact that the plan is centered in the financial market as motor for development already is wrong.

1) Ļoti nopietni aicinu ņemt vērā atšķirību starp “izaugsmi” un “attīstību”. Diemžēl ekonomikas zinātne ir diezgan ideoloģiska. Vairākas pieejas, tā skaitā tā, kas ir pašlaik modē, pieņem, ka izaugsme un attīstība ir viena un tā pati lieta. Taču, izaugsme nenozīmē attīstību. Mums bija ļoti strauja izaugsme starp 2004. g. un 2008. g., bet ir skaidrs, ka tā nebija attīstība. Tas ir viens punkts, ko SC un citi noteikti kritizēs. Attīstības līmeni var konkrēti  un  viegli noteikt, salīdzinot valstu eksportus. Piemēram, Latvija un Zviedrija. Mēs galvenokārt eksportējam primāras preces (lai gan 4.41% no mūsu eksportiem bija farmācijas produkti 2009. g., kas ir labi). Zviedrija eksportē ieročus, Volvo un Scania mašīnas, IKEA (tās nav vienkārši mēbeles, bet ir koncepcija: dizains, praktiskums, kvalitāte), Ericsson telekomunikāciju iekārtas un, vēl svarīgāk, tehnoloģiju, Electrolux sadzīves tehniku, utt. Ja mūsu ekonomika turpinās augt tajos pašos sektoros kā līdz šim, mēs neattīstāmies. Vai nu mēs stagnējam, vai mēs palikām arvien vairāk attīstīto valstu aizmugurē. Izaugsmei ir jābūt ar attīstību.

2) Šis plāns palielinās inflāciju. Tas nav kaut kas īpaši tikai šim plānam piemītošs. Jebkurš attīstības plāns vairāk vai mazāk rezultē inflācijā. Piemēram, ieguldot 1 miljardu latu attīstībā, tas nozīmē palielināt valsts monetāro bāzi, kas rezultē inflācijā. Tas ir Miltona Fridmana ekonomiskās teorijas kodols. Ir zināms, ka Latvijas inflācija pieauga no 6.57% 2006. g. uz 15.25% 2008. g.. Tajā pašā laikā, M2 (monetāra bāze) pieauga no Ls 5456 miljoniem uz Ls 6401.9 miljoniem. Tas ir apmēram tā summa, kuru tagad plānojam ieguldīt attīstībā. 

 

 

 

 

 

 

 

Man nevajag atgādināt, ka mums ir mērķis adoptēt eiro 2014. g.. Lai gan personiski tam es nepiekrītu, jo tas neatrisina ekonomikas nestabilitāti (Grieķija, Irija, Portugāle, Spānija) un atņem mums spēju pragmatiski lietot valūtas kursu kā attīstības instrumentu, lai palielinātu Latvijas produktivitātes līmeni starptautiskajā tirgū, ir skaidrs, ka, ja inflācija pieaugs, mēs nebūsim Eirozonā 2014. g.. Līdzīgs gadījums jau bija 2007. gadā.

Visparastākais instruments, lai tiktu galā ar inflāciju, ir palielināt procentu likmes, tādējādi samazinot gan kredītu pieejamību gan lai stimulētu investīcijas. Mērķis ir samazināt kreditešānu. Taču mēs nevaram vienkārši palielināt RIGIBOR, notiks pāreja uz aizņēmumiem eiro. Ekonomiskā literatūrā procentu likmes jēdziens ir definēts kā “naudas izmaksas.” Tāpēc mums ir tiešām:

a) Jāpalielina naudas izmaksas. Taču ir jāņem vērā, ka no vienas puses vajag kredītus uzņēmumu un infrastruktūras attīstībai, no otras puses, vajag ierobežot citu kreditēšanu, galvenokārt kredītu patēriņam. Valstij stingri ir jāierobežo gan banku gan nebanku darbība kreditēšanas jomā, palielinot specifiskos nodokļus un prasības. Tas arī palīdzēs pasargāt maksājumu bilances tekošo kontu no papildus deficītiem. No otras puses, jāstimulē kreditēšana uzņēmumiem, eksportiem, utt. Te svarīga loma varētu būt attīstības bankai

b) Jāīsteno pēc būtības valsts administratīvā reforma. Galvenais mērķis ir samazināt valsts izdevumus, vienlaikus palielinot valsts finanšu kapacitāti. Tas gan palīdz konsolidēt budžetu, gan mazina inflācijas risku, gan palielina valsts kapacitāti investēt sociālās programmās.

Ir citas iespējas, tāču sapigākas.

3) Lai palielinātu darbavietu skaitu, lai stimulētu ražotņu veidošanos reģionos ( līdzīgi kā Vācijā un Somijā ) un lai tiktu radīti jauni uzņēmumi, ar ES fondiem nepietiek un nevaram paļauties uz bankām. Bankām ir savas intereses, kuras ne vienmēr sakritīs ar valsts interesēm. Tāpēc mums ir jāveicina tiešās ārzemju investīcijas Latvijā. Taču, veicinot investīcijas, ļoti svarīgi ir saprast to, ka investīcijas ir dažādas ar dažādu ietekmi un atšķirīgu piesaistes loģiku. Citiem vārdiem sakot, finanšu investīciju piesaistes loģika ir viena, bet produktīvu investīciju piesaiste preču ražošanā un reālā sektora pakalpojumos ir cita. Lai piesaistītu produktīvas investīcijas, ar vienkāršu finanšu stabilitāti nepietiek. Svarīgākie punkti saskaņā ar ekonomisko literatūru te ir sekojoši:

- Politiskā stabilitāte: 15

- Nacionalizācijas risks: 15

- Kapitāla kustības brivība – 15

- Birokrātija (t.sk. valsts caurspīdīgums, tieslietu sistēmas uzticība, utt.) – 15

- Iekšējā investīciju vajadzība – 10

- Ierobežojumi ārvalstu investīcijām – 10

- Ierobežojumi ārvalstu kapitāla palielināšanai – 8

- Iekšējās nekārtības risks: 8

- Kulturāla līdzība: 4

Vispārīgi faktori, kas ietekmē industriālo lokalizāciju (0-100):

- Darbaspēka pieejamība: 72

- Pieeja tirgum: 65

- Izmaksu struktūra: 59

- Biznesa vides “viesmīlība:” 56

- Dzīves kvalitāte: 52

- Transports/infrastruktūra: 23

- Telekomunikācijas: 09

No izmaksu viedokļa faktori, kas ietekmē industriālo lokalizāciju, izmaksas par vienu ražotu vienību (costs per unit output)

- Izejvielu piegāde

- Darbinieku izmaksas

- Elektrība

- Izplatīšanas izmaksas

- Mārketinga izmaksas (ja uz iekšējo tirgu)

Pieskaitāmie uzdevumi

- Īpašumu nodoklis

- Uzņēmumu ienākumu nodoklis

- Uzņēmumu sociālais nodoklis

- Inventāra nodoklis (ja ir)

- Komunālo pakalpojumu izmaksas

Citi

- Nekustamo īpašumu iegādes izmaksas

- Būvniecības izmaksas

- Iekārtu iegādes/pārvietošanas izmaksas

- Kredīti vai/un subsīdijas investīcijām

- Personāla pārvietošanās izmaksas

Tāpēc doma, ka eiro ieviešana stabilizēs finanšu sektoru, tādējādi veicinot investīcijas, ir  maldinoša. Eksportētājiem stipra valūta ir nevēlama, lai nebūtu Niderlandiešu slimības sekas (Dutch Disease). Protams, ka stabils finanšu sektors ir svarīgs. Bet tas nav galvenais, lai veicinātu tās investīcijas, kuras rezultē attīstībā. Ir arī vērts atcerēties, ka Eiro kā valūta nav stabilitātes garantija. Citiem vārdiem sakot, tas neatrisina ekonomikas nestabilitāti (Grieķija, Īrija, Portugāle, Spānija, Itālija) un atņem mums spēju pragmatiski lietot valūtas kursu kā attīstības instrumentu, lai īstermiņā palielinātu Latvijas produktivitātes līmeni starptautiskajā tirgū.

Aicinu arī skatīties uz Eiro ieviešanu 2014. g. pragmatiskāk, lai tas nebūtu politiskais bet gan ekonomiskais mērķis. Galu galā finanšu analītiķi ir arvien vairāk skeptiski par Eirozonas spējām. Grieķija, Īrija, Portugāle ir 9% no Eirozonas IKP. Spānija un Itālija ir 29% no Eirozonas IKP. Kopā, runa iet par 35% no Eirozonas IKP. Vairāki komentētāji sāka, ka Eirozona “is a club that no one wants to join.”  (BBC, FT, u.c.).

Plānā, kas ir ļoti īss, konceptuāls dokuments, atbildes – vai un kā Latvijas valsts plāno šos jautājumus risināt, nav.

4) Lai palielinātu Latvijas ražojumu konkurētspēju ārzemēs, ir ļoti svarīgi veikt Latvijas preču un pakalpojumu popularizēšanas pasākumus ārējos tirgos. Taču ar to nepietiek. Konkurētspēja balstās uz faktoriem, kas samazina ražošanas izmaksas. Plānā minētie pasākumi samazina mārketinga izmaksas, bet ne citas, t.sk. nepalīdz ieviest produktīvākas tehnoloģijas.

Protams, ka visvieglākais veids lai palielinātu konkurētspēju ārzemju tirgos, ir devalvēt valūtu. Zviedrija ir to darījusi. Lielbritānija, lai to izdarītu, aizgāja no EKIs 1990-jo gadu sākumā. Lai gan aicinu domāt par devalvāciju Māstrihta kritērija +- 15% koridorā – kā par daļu no attīstības programmas, Latvijas gadījumā vienkārši devalvācija pati par sevi neko īpaši nedod.

Fakts ir tas, ka Latvijas produktivitātes līmenis ir viens no viszemākajiem Eiropas Savienībā. Produktivitātes līmeni rēķina ņemot vērā cik daudz vērtības viens strādnieks rada  utt. utt.   Līdz ar to zemo produktivitāti nosaka a) slinki/neizglītoti/bezatbildīgi/utt. darbinieki, b) zemas tehnoloģijas lietošana, c) pārāk liela birokrātija (ja pakalpojumu sfērā) gan paša uzņēmuma vainas gan valsts vainas dēļ, d) neefektīva industriāla organizācija, kura mazina “economies of scale,” un e) tas, ko valsts ražo (piemēram, mēbeļu ražošanā var lietot vislabāko tehnoloģiju, taču, ja tās ir vienkāršas mēbeles un pievienotā vērtība ir zema, produktivitāte arī ir zema). Tāpēc plānam arī vajadzētu būt skaidrāk par inovāciju lomu, utt..

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Video lekcija – Entreatos: Lula a 30 Dias Do Poder

Written on September 10, 2011 by Jānis Bērziņš in Uncategorized

Kad: otrdiena. gada 13. septembris – 17:30 – 20:00

Kur: Kinoskola, 13. janvāra iela 33, 2.stāvā

Vietu skaits ierobežots, tādēļ lūgums laicīgi pieteikties, reģistrējoties tiešsaistē: http://bit.ly/pX75hr

Video lekciju vadīs RSU macībspēks Jānis Bērziņš. Filma portugāļu valodā ar angļu subtitriem.

Apraksts:

In 2002, the Brazilian director João Moreira Salles followed with his crew the candidate Luís Inácio Lula da Silva in his campaign for President of Brazil. The collection of footages in meetings, debates, hotels, airplanes and other places with his political allies and friends and acquaintances have been edited in an interesting documentary about the behind scene life of Lula.
“Entreatos” is the “Making of” of President Lula’s successful campaign for President of Brazil, elected with 61% of the valid vote – about 53 million votes. The phenomenon Lula, who has come from the working classes, is the first leftist President of Brazil. His party – PT, Partido dos Trabalhadores (meaning Workers Party) – was founded in 1980, and after twenty-two years of existence, three defeats and systematic opposition to Fernando Henrique Cardoso for eight years, has finally elected Lula. Watching this documentary in 2008, there is a testimony of some of the successes and failures of his promises while candidate: among his great achievements, the improvement of the Brazilian Economy and the lower classes; among the great deception, the lack of ethics of many of his political allies and friends, involved in scandals later. However, it is nice to see Lula as a flawed human being, with open heart and very sincere in some moments, telling funny stories about his past.

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Erik Reinert in Rīga (Video)

Written on August 27, 2011 by Jānis Bērziņš in Uncategorized

Erik Reinert was in Riga last Wednesday discussing economic development. He also discussed privatizing LMT and Lattelekom, and said that Anders Aslund’s ideas are danger for Latvia. I completely agree. Click here for an analysis of who are Aslund, Valdis Dombrovskis book’s author (in Latvian).

 

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Latvia and Development: Learning from Previous Mistakes? (The Baltic Times – August 03, 2011)

Written on August 9, 2011 by Jānis Bērziņš in Uncategorized

Latvia and Development: Learning from Previous Mistakes?

Jānis Bērziņš

There is a saying that one must learn from his or her own mistakes. Some months ago, President Barack Obama announced that the USA will create a development bank similar to the Brazilian National Bank of Social and Economic Development, to finance energy, sanitation, and transport infra-structure projects. This is strange. After all, the USA has been championing Neoliberal policies for several years, supporting general deregulation, liberalization, privatization, all in the name of the allegedly uber-rationality of the market, one based on surreal mathematical models. Is the USA turning its back to Neoliberalism and starting to look to the infamous developmentalism, after 40 years?

In reality, the case is that the USA is finally recognizing what the economic academia, even the most ideologically blind guys in Chicago, have known for years: that markets are imperfect, thus perfect competition doesn’t exist. The fact is that the concept is just useful as a teaching instrument to explain basic economics, and should never be used as a basic presupposition to real-world economic policies. Neoliberalism is not only based on the idea that perfect competition is the norm, but also on the notion that the financial sector is both rational and stable, from the economic development perspective.

The current world economic crisis is a direct consequence of this belief. Putting it clearly, it would be sufficient to provide a stable macroeconomic environment, from the financial market point of view. This is what the USA, the European Union (but not Germany), and Latvia have been doing. Empirical evidence shows that the price paid for this choice is economic stagnation. While China invests 8 percent of its GDP in infrastructure, the USA invests only 2 percent. The result is clear: in the last 30 years the USA’s GDP grew 1.7 times, while China’s 17.7. Of course, the USA is expected to have a lower GDP growth rate, as it’s in another stage of development. But such a huge difference can be explained only as the output of mistaken economic policies that saw the market opposed to the state, as in the USA’s case. Although Wall Street seems to be vigorous even in times of crisis, the USA’s real economy is not doing well.

The fact is that a weak state doesn’t generate a strong market. It’s the cooperation between both that results in development. Any development plan in Latvia should take this into consideration.

First, the government must be the agent responsible for defining a strategy of national development; it is the key institution for development. It’s the state’s duty to create investment opportunities. Second, reforms must be directed to strengthen the state and the markets. In this case, the administrative reform of the state is fundamental to changing the role of the state. Third, the state must have a limited and strategic industrial policy, mostly focusing on creating new business, increasing productivity, and technological modernization.

At the same time, it also must try to neutralize the tendency of wages growing more than productivity and the overvaluation of the real exchange rate. Fourth, development must be financed by foreign direct investment in the real sector, and/or internal savings. Fifth, macroeconomic policy should focus on three points concomitantly: inflation, the real exchange rate, and employment. The three are fundamental for development. Sixth, the fiscal standard must be defined very rigorously regarding public deficits and public savings. Again, before reforming its fiscal policy, Latvia must face the administrative reform of the state.

Seventh, the exchange rate must be floating, but managed, inside the +-15 percent corridor permitted by the Maastricht criteria aiming for the industrial equilibrium exchange rate, the one making sophisticated manufacturing industries viable to avoid the effects of the Dutch disease. Eighth, the government, the Bank of Latvia, and the Financial and Capital Market Commission, in case of necessity, shall actively limit the influence of the financial markets in the national economy to avoid over-heating and speculation. Ninth, both budget and current account deficits should be rejected, mainly on the trade and services accounts. Tenth, a fiscal reform is needed, reducing taxes on the poor. This is important, as it increases their income without incurring in increasing industrial costs. This boosts the consumption of local products.

The idea is simple. Standard barber-shop economics restricts the concept of stability to the interests of the financial market, thus only restricting public expenses and inflation. The key is to include asset price stability, the equilibrium of the balance of payments, and the notion of full employment. We need to reject the idea that a primary surplus without structural reforms is enough. It only results in foreign over-indebtedness and financial fragility. Finally, discussions started in Latvia, also within several parties, about a more active role of the state in promoting development. Let’s hope the short-sighted radicals won’t convince policy-makers that these policies are tantamount to Marxism-Leninism, or against the Ethnographic Open-Air Museum.

Janis Berzins teaches at Riga Stradins University’s faculty of European Studies.

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Vienotība: it’s alive!!!

Written on August 7, 2011 by Jānis Bērziņš in Janis' opinion, Latvia

Vienotība?

Vienotība is alive. I was there. Now, it’s my party. It was interesting to watch the process. Three political groups with different visions about several issues, including how to promote economic development (or growth, as some prefer because of their economic based on ideology opinion approach), administrative reform of the state, etc, now united, forming one party. Now, it’s my party. A political Frankenstein?

After SCP (my former party) decided to join Vienotība, as other SCP’s members, I was a little uncomfortable: are we giving up our ideals? Are we assuming the ideals we had when we founded SCP were wrong? Are we joining a bunch of neoliberals? I thought about theses questions for several days. Of course, I’m clearly against neoliberal policies. Empirical evidence shows that they have been increased the poverty gap between rich and poor countries. This includes Latvia, unfortunately. Even the IMF admits it. If you don’t believe, you can read any of the United Nation’s Development Policy and Analysis Division World Economic and Social Survey of the last 8 years. Or you can read any of the UNCTAD reports from there last 10 years. Oh! You don’t believe them! The statistics are falsified! My god! How I didn’t realize they’re part of the nazi-communist international conspiracy against capitalism, the Latvian language and the Ethnographic Open Air Museum! Naturally.

The guys from the UN and the UNCTAD accordingly to some Latvian politicians

I found the answer to these questions remembering when I used to work with politics in Brazil. I was member of the PMDB, the party against the military dictatorship. During the Brazilian military dictatorship there were two parties: ARENA (later PDS) and MDB (later PMDB). ARENA was the party of the torturers and corrupt catholic oligarchy military and conservative political sectors of the society; MDB was the party created by the militaries to be opposition. There were even elections for the Brazilian parliament and senate. In the beginning of the 1990′s, PMDB was the biggest party in Brazil. It clearly had three fractions, representing leftist, centrist, and rightist ideas, mostly about the level of state intervention in the economy. The internal clash was huge. Not only about ideas, but about different internal fractions trying to take power. I’ve actively participated of this process. Really very interesting and educational.

The answer I found is “no.” No, we are not giving up our ideals. No, we are not assuming our ideals are wrong. No, we’re not joining a bunch of neoliberals. To call JL and PS a bunch of neoliberals is an oversimplification. Vienotība is a big party, like the PMDB was twenty years ago. Taking in consideration the distribution of right-wing, centrist, and left-wing groups, we can say that the party’s ideology is really centrist. Centrist, because the clash of internal forces soften the party’s ideology, making it to converge to the centre.

Another factor is my deep belief that it’s wrong to sit at home and complain. Everyone MUST participate the political process. If not, you’re guilty if things go the other way you believe. Also, I firmly disagree with founding new parties for each individual disappointment, and worst, based on public figures. Parties must be based on ideas and ideals. I’m with Vienotība, because I agree with its ideas and ideals, although it’s known that I disagree on how to achieve theses ideas and ideals. But I don’t believe in founding parties based on one individual: Zatlers’ Party, Šlersers Party… What will we have? One person’s pocket party? Ilze’s Party, Anna’s Party, Runcis Bar’s Party, Janis’ Party… Taking in consideration SC doesn’t recognize the occupation, ZZS is about Lembergs, Šlesers’ Party is what it is, Šlesers’ Party, Zatlers’ Party, although they deny, yes, it’s a right-wing neoliberal party. Thus, what is the choice? I’m definitely not sitting home and watching good ideas turning into economic problems.

Vienotība is a very important democratic experiment. In Latvia, usually, the group detaining the power within a party and its leaders expect the party members to be obedient to their orders and directives. They expect that there’s no internal competition for power. The leaders talk, establish one and only internal coalition and party members approve or disapprove their choice, which usually is about themselves and their protégés. There’s no competition. If Vienotība is really democratic, instead of people leaving the party to found another one, there’ll be internal political struggle for power. As happens in all big parties in democratic societies. Extremely healthy. Let’s hope that the Latvian political environment is ready for such level of democracy. No. Vienotība isn’t a political Frankenstein. It’s about democracy. At least, I hope it is.

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Ha-Joon Chang: Economics Upside Down

Written on July 30, 2011 by Jānis Bērziņš in Uncategorized

Chang has very interesting ideas that defy common wisdom in economics. In the past 40 years there have been a very strong process of methodological brainwashing in favor of a specific set of economic beliefs. This is a problem with Social Sciences in general, reflecting the tendency of people looking for acceptance. Yes, the good old  Adam Smith’s “Theory of Moral Sentiments.” By one side, people looking for acceptance at the academic field will connect to those ideas which are the mainstream. By the other, journalists, pundits, and politicians, people who usually never studied economics, who never read Smith, Ricardo, Marx, Jevons, Veblen, Schumpeter, Keynes, Hayek, Friedman, just to cite the most well known, because or it’s a) too difficult, or b) “I don’t have time”, or c) everybody know this is outdated, will start to repeat specific ideas like pirate’s parrots. These ideas will then turn to be common sense, they will start being distorted and, finally, they will turn into dogmas. It happened with Keynesianism, it happened with Neoclassical Monetarism/Neoliberalism, it will happen with the next one that is already being established and we don’t know what will be.

So, I would like to ask you to be opened to dialogue. In other words, to doubt your own beliefs. Hear the man. After all, he is a professor in Cambridge.

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Europe’s €200 billion reverse wealth tax explained

Written on July 29, 2011 by Jānis Bērziņš in Articles

Harald Hau (Associate Professor of Finance, INSEAD and CEPR Research Affiliate)

Last week, the European heads of government added €109 billion to the existing €110 billion rescue plan for Greece. As Europe’s financial sector would have otherwise taken a huge hit, this column address the question: How did the financial sector manage to negotiate such a gigantic wealth transfer from the Eurozone taxpayer and the IMF to the richest 5% of people in the world?

When the deal was announced, German Chancellor Merkel highlighted the private-sector involvement. She stressed that this was the result of German intransigence. According to the spin, private creditors have to accept a 21% write-down on their claims. This amounts to a €37 billion private-sector contribution. They also provide €12.8 billion in new loans for debt buyback. This buyback, however, should not count as a private-sector contribution as it amounts to an exchange of one debt for another.The private creditors’ contribution is therefore extremely modest compared to the €109 billion in new public commitments. Especially given that private creditors had the most to lose. Given that the market discount was already 50% for Greek debt, giving up 21% could be viewed as a gain. This has to be qualified as a very bad negotiation outcome for the Eurozone taxpayer.

A closer look shows the deal is much worse for taxpayers

The new plan foresees so-called credit enhancement for the new debt, which means that the new Greek debt is mostly guaranteed by the European Financial Stability Facility (EFSF) – and thus by the taxpayers. Now, in the financial world, a guarantee is worth hard cash – it’s like getting automobile insurance for free.This is no small concession given that a successful turnaround for Greece is highly uncertain. The economy still is burdened with an excessive debt of around 132% of GDP; large structural policy reforms have not yet begun and may well fail. Most creditors can foresee this and are happy to accept the public guarantees for their debt before the next and much bigger haircut comes.We can therefore expect that they take up the debt exchange offer “voluntarily”, since it is effectively a gift to sovereign creditors and not a bailout contribution.

What about Egalité? Tax for wealth, or on wealth?

More surprising is Sarkozy’s spin on these events. He interpreted the new deal as an important step towards Europe’s economic governance. But before taking too much pride, Sarkozy should remember that a €200 billion subsidy to sovereign creditors is a gigantic wealth transfer from the taxpayer to essentially the richest 5% of the world. In the US, the 5% richest households control roughly 70% of all financial wealth, and this percentage is not much different in the rest of the world. Ultimate ownership of bank capital and sovereign debt is so concentrated among high-wealth individuals that we should characterise the bailout subsidy as an “impôt pour la fortune” (“a tax for wealth”) – a wealth tax supporting the rich.This should be problematic in a country like France which has been fighting bitterly over the so-called “impôt sur la fortune” (a wealth tax on the rich). This latter wealth tax amounts to a mere €4 billion annually in state revenue.
Why are the French not at the barricades over the structure of the Greek bailout?
This is a difficult question. Self-censorship by the mainstream French media might play a role, which – mostly left-leaning – does not want to provide ammunition to Eurosceptics like Marine le Pen before next year’s presidential elections. But even in France it will not remain unnoticed that almost all of the public funds go to creditors and hardly benefit the ordinary Greek citizen.

Why did taxpayers get such a bad deal?

In principle, governments should have been in a very strong position. Private default can end in the liquidation of a company, but a country cannot be liquidated. This puts private creditors in a very weak position when it comes to negotiating with a government and empowers the latter. But why was this not the case in the current debt crisis?

  • Bankers and many journalists convey the impression that we face a choice between a full sovereign bailout and a catastrophic banking crisis.
  • ECB executive board member Lorenzo Bin Smaghi even suggested that any talk about private bail-ins would increase the costs for the taxpayer.

Such assertions confuse more than they clarify, because they (falsely) suggest that there was no alternative.The banking sector is the weak spot of any restructuring plan involving sovereign default. Here, direct bank support through bank recapitalisation is a much more effective and cheaper solution than a full guarantee of sovereign debt.The taxpayers could get bank equity in exchange for their money. If this crisis is like others, there is a chance that share values recover and taxpayers break even in the long run. The 2007-2009 crisis has shown that governments are indeed able to contain a banking crisis by resolute action like forced recapitalisation and temporary nationalisation of banks.The better prepared we are for such an event the smaller will be the impact on the economy. Europe’s governments have had plenty of time to prepare over the last year, so why was such a solution not even considered?The reasons are political. Such a solution would have upset powerful vested banker interests, even though it would have imposed the costs on those most responsible for the massive credit misallocation.A strong negotiating position of politicians confronts two important obstacles:

  • First, the finance ministry and banking authority typically lack competence and information in order to prepare contingency plans for bank recapitalisation.

There is an acute skill shortage in the finance ministry and what talent there is meets a wall of secrecy put up by an uncooperative banking sector.

  • Secondly, the strong lobbying power of the banking sector deters politicians from preparing in advance and taking risks in favour of the taxpayer.

Conflicts of interest between the politicians and the bankers are rampant.After the disastrous risk-management performance of many bankers revealed in the 2007-2009 banking crisis, it is surprising that the same people still enjoy great influence in the policy process. The consequences are predictable.

  • If you ask a frog to come up with a plan for draining a swamp, you are like to end up with a proposal for more flooding.
  • Bankers were asked to come up with a plan for private-sector involvement under the leadership of Ackermann and the Institute for International Finance; what they came up with was a plan for more support.

We would never ask the tobacco industry to work out a new public health policy.A further problem is the fragmentation of political power in Europe. This prevents the political authority from taking a strong negotiating position against the sovereign-debt creditors. In 1982, when the US faced a sovereign-debt crisis brought about by US banks’ lending to Latin American nations, US finance minister Baker rejected private-sector demands that the US taxpayer bail out of creditors. While this seems similar to the position of German Chancellor Merkel, her position is much weaker.Lastly, the ECB played a very obstructive role in preventing any effective bail-in of private creditors. This strengthened the “hostage taking” of the political authorities. At times, ECB board members gave the impression of being themselves captured by the financial elite of their home country. The ECB severely damaged its own reputation by siding so strongly with creditors and bankers rather than defending Europe’s taxpayers and citizens.

And the future?

If the recent Greek bailout foreshadows the future of Eurozone “economic governance”, the real question is “how much of this governance can the euro survive?”The political economy of these European bailouts is unlikely to improve before the next sovereign-debt crisis hits. This would require that politicians take on the powerful banking lobby by forcing much higher capital standards on Europe’s undercapitalised banks. There is no sign of this happening. The real peril for the euro may come from a taxpayer revolt against a financial elite that has betrayed the interests of the majority of citizens.

From http://www.voxeu.org

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Vēsture un ekonomika/History and Economics

Written on July 22, 2011 by Jānis Bērziņš in Bērziņš TV, Economic History, Uncategorized

To put History away has been necessary to support the sacrosanct Neoclassical church, Neoliberalism’s base. But theory and reality should walk together. The question is how to support a mainstream economic theory, which influences political science, sociology, etc, with History showing that its theoretical presuppositions are denied by reality and even lack of logic? Neoclassical economics is the ideology of reforms in Latvia. Why can’t we be more pragmatic and less ideological? By the way, these discussions have been financed by Soros. Yes! George Soros.

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The Magic is Lost (The Baltic Times – July 06, 2011)

Written on July 21, 2011 by Jānis Bērziņš in Uncategorized

Before the article itself I would like to say that…

I do call Mr. Valdis Dombrovskis “Harry Potter” in this article. Later, I play on words calling him “Valdis Poterovskis.” Since he (or it was Aslund?) wrote in his book that “Finally, the international macroeconomic discussion was not useful but even harmful. Whenever a crisis erupts anywhere in the world, a choir of famous international economists proclaim that it is “exactly” like some other recent crisis—the worse the crisis, the more popular the parallel. Soon, prominent economists led by New York Times columnist Paul Krugman claimed that “Latvia is the new Argentina.” A fundamental problem is their reliance on a brief list of “stylized facts,” never bothering to find out the facts.” Although I never compared Latvia to Argentina, although I said to Mark Weisbrot the comparison was equivocate and poor when he was in Riga, I have to agree with Edward Hugh who said that “As a macroeconomist who has been deeply involved in the Latvian debate I have to say that if such statements weren’t so foolish (and ill-befitting of the Prime Minister of any country) I would want to protest that they were extraordinarily condescending and even verging on being insulting.” (http://fistfulofeuros.net/afoe/bells-in-hell-that-dont-go-ting-a-ling-a-ling/) It’s exactly this sort of religious view, the good against the evil, Neoclassical economics against the rest, we’re right you’re wrong, that should be avoided. Every discussion is important, even if its presuppositions sound wrong. Dombrovskis has a huge merit in having conducted the political process to get the IMF/EU money. It wasn’t easy. He made it and I think he deserves all acknowledgement. But he should learn to be more modest when discussing economics, as he isn’t an economist. He’s a physicist. Nevertheless, having heard a lot about Dombrovskis, I know he’s a very nice person. That’s why I’m convinced that all the arrogance comes from Aslund.

The Magic is Lost

Jānis Bērziņš

Since when I was making my bachelor studies in Economics I have developed a great interest in Political Economy. For readers from Eastern Europe, Political Economy usually is connected with Leninism-Stalinism, the distorted aberration of Marx’s ideas that gave base to the Soviet Union. However, Political Economy is more than this. It is the study of economic ideas and its relationship with social reality, including the influence of politics in economic life. Thus, it is not restricted to leftist ideas. Rather, socialist and communist ideas are part of the Political Economy’s debate, as free market and economic liberalism also are.

Radical right-wing economists like Ludwig von Mises, Friedrich von Hayek, and Milton Friedman also considered they were doing Political Economy. For example, one of the most prestigious academic journals in economics is Chicago University’s “Journal of Political Economy,” where Milton Friedman published several articles such as his “A Theoretical Framework for Monetary Analysis,” in 1970. To put it simply, Political Economy is not about Marx or socialism. It’s the study of economic ideas: their origins, their philosophical base, and, extremely important, their logic. Unfortunately, real logic is something very rarely taken in consideration in the economic debate nowadays.

Of course there is some logic when discussing economics, but it is too superficial. One example is both European Union and Latvia’s plan of development. The logic is that fiscal consolidation results in boosting financial markets’ confidence, thus investment. As a result, the magic of development is guaranteed. It was very well explained by Jose Manuel Barroso: “without fiscal consolidation we will not have growth for a very simple reason: There will be no confidence. Without confidence, no investment; without investment, no growth.” (International Herald Tribune, December 29, 2010). This is the same logic Valdis Dombrovskis’ ghost writer Anders Aslund used in their book.

This is a very seductive axiom. I can see people shaking heads positively when hearing it and even thinking “This guy is brilliant. I read the same thing in the newspaper one of these days.” However, the assumption that a consolidated budget automatically results in development is false. There’s no empirical evidence in the economic literature of such direct causality, even in the writings of the most apologetic believers in neoclassical economics. Thus, it’s an opinion and not economic science.

What the academic economic literature shows is that there’s a causality between consolidated budgets and the easiness of the state financing public debt by issuing bonds. The idea is simple. If the budget has a surplus, the government will be able to repay the bonds’ nominal value, thus it’s a secure investment. In other words, the government can finance public debt in the private financial system. Why would it result in development? Because, if competently used, public debt is one of the most important instruments of development. It results in investments in infra-structure and social policies. Unfortunately, this is not Latvia’s case, as our surplus will have to be used to pay for our debts.

Although claiming in his latest book to be the Harry Potter of economics, what Valdis Dombrovskis’ government has accomplished until now? First, public debt exploded from 23.91% to 43.01% of GDP. Second, internal devaluation is not working. Production costs have been increasing  in the last six months. In comparison with their lowest in November, 2009, they were already 15% higher in May, 2011. Nominal wages are again in the same level than in July, 2008, while real wages are in the same level than in September 2008. Overall, Latvia’s price index reached its low point in December, 2009, but now it is already higher than in the beginning of 2009. In other words, Latvia’s internal devaluation happened between March and December, 2009, when prices started growing again. Finally, taking in consideration oil prices, deflation would had to be more intense then it was.

Am I loosing something? Where is Valdis Potterovskis’ magic? First, Latvia’s crisis was basically of liquidity and not of solvency, solved by the IMF. That’s why the financial market remained so calm. In the next years we’ll see if we’ll have a crises of solvency as Greece or not. So, “nosing izpeshial.” Second, it’s lost in the lack of real structural reforms, including the very needed administrative reform of the state to reduce the costs of doing business in Latvia. I’m convinced Dombrovskis himself very much wanted to do these reforms. The problem has been always the coalition with Lembergs, sorry, with the Green and Rustics Union’s (ZZS).

 

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