Reveries

Dear all, I know it’s more than one month I’m not writing. I’m writing my PhD dissertation with a great dedication. I really need to end it soon. However, as usual, I’ve been thinking about economic development. One of nowadays most interesting thinkers is Ha-Joon Chang from Cambridge. He has been in Riga talking about his book “Bad Samaritans”. Below you may watch him speaking about his book. Highly recommended.

Popularity: 15% [?]

Usually, I refuse to make any kind of advertisement on my sites. However, I liked so much the Book Depository’s idea, that I’m advertising them. The deal is they have very competitive prices and they delivery for free, practically worldwide. As usually delivery rates are very expensive (Amazon is outrageous), shipping and handle may be the book’s price. In this case, with free delivery, the book’s price is the same as if buying it in the UK. It’s really OK. Take a look:

Of course, a good alternative is to buy used books on Ebay. Also very recommended!

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This is the English version of the article published in Latvian on Diena.

Devaluation in Latvia and the fallacy of socio-economic development

Jānis Bērziņš1

A lot has been discussed about the desirability of a devaluation in Latvia. The main idea is that through devaluation Latvian products are going to be more competitive in the international market, resulting in boosting exports. It also would assure economic development and would help to solve the imbalances of the Balance of Payments. Although this idea is theoretically correct, in Latvia’s case it’s not so simple.

By the macroeconomic side, Latvia’s economy has passed through a process of restructurization with the establishment of unsustainable sectors that amounted for about half of the GDP in 2008 (speculation with real estate actives, consumption of durable goods, financial intermediation and transports and storage). This was the consequence of years of equivocated economic policy and predatory behavior by politicians and civil servants,  which has resulted in the establishment of a system that discourage investment in the real sectors of the economy.

By the microeconomic side, Latvia has one of the worst levels of productivity in relation to the European Union. There are problems of standardization, quality and losses in the productive process, as there is also a lack of investment in new equipments, technology and development. Of course there are exceptions. Besides, some of Latvia’s businessmen still have the Soviet culture of “We don’t do business. We settle things”, what’s different from the Western logic. Also, most of the Latvian firms are small, what results in diseconomies of scale.

It’s true that the real exchange rate is over-evaluated2 and that almost fixed exchange rate never should be adopted by the Bank of Latvia, as it always results in crisis.3 It’s also true that an over-evaluated exchange rate decrease exports, therefore, reduces the level of economic activity. However, due to Latvia’s economy lack of sustainable development, a direct devaluation would rather have the following consequences:

a) Latvia imports most of what is consumed in the country. A devaluation would immediately result in inflation, deepening recession. Inflation results in smaller real salaries. The consequence is the increase of assaults, robbery, alcoholism, suicide, etc. Also, it would increase immigrations, leaving the country without qualified workers, making very difficult to start some business due to the lack of qualified workforce and/or the high costs of labor.

b) As most of the inputs are imported, a devaluation would increase a significant part of the costs of most of the inputs of the productive and services sectors, considerably reducing or even neutralizing the artificial competitiveness gained with the devaluation.

c) The productivity of Latvia is one of the lowest in EU affecting the competitiveness of the Latvian exports. The experience of other countries suggests that strong devaluations  results in the decline of private sector investments. In this case, devaluation would rather act as a disincentive to innovation and investments. Also, as there is a significant difference between the costs of electricity, water and wages between the EU and Latvia, low levels of competitiveness are the result of inefficiency or high profit rates. Competitiveness must be gained by real productivity gains and reduction of the profits margins.

d) Latvia’s private sector foreign currency exposure is around 70% of GDP, with the corporate sector’s foreign currency open position practically double that of the household sector.  A devaluation of 15% – to remain under the limits of the Maastricht criteria – would increase private sector net foreign currency exposure by 11 percent of the GDP of 2008, two thirds in the corporate sector and one third in the household sector. Private consumption would fall, house prices decline, debt service costs increase, and consumer confidence deteriorates.

Due the problems above, a devaluation would be desirable only as part of a strong policy to promote sustainable economic development. However, the truth is that a devaluation is already occurring in Latvia through the recession, deflation and increase of unemployment of the last months, and that tends to be worse after the summer. Deflation and economic recession are reducing our relative prices in the international market.

That’s the same effect of a direct devaluation and that’s exactly what the IMF and Latvia’s government have agreed to do. In the IMF’s own words, “(…) real exchange rate overvaluation would need to be addressed through (…) a recession in the short run, and slow growth for several years to come”. However, Latvia needs to develop its economy and not to face years of slow economic growth. That’s why a new model of development is necessary.

The first thing to be done is to change the tax system. Latvia’s tax system is inverted. It must be changed, simplifying and reducing the taxes of the real sector and people, while imposing taxes to Real Estate business and property, financial capital gains and natural monopolies. Also, a special regime of tax exception to new business in innovative sectors or using innovative methods should be established. Also, all bureaucracy related not only to start a business but to maintain it must be reduced, including a “grāmatvedības reforma”. The third point is that the state must provide physical space and infra-structure, by donating or allowing investors to use state-owned land to form technological and industrial parks for free.

After the nationalisation of Parex Bank, Latvia now has two state-owned banks; thus, it is desirable to concentrate commercial operations in one bank, preferably Parex, and to turn the Hipotēku Banka into an investment bank committed to socio-economic development. As a development bank, it must establish a strong program of credit directed to the establishment and development of companies producing or using innovative products or technologies. This credit must be given at the lowest possible interest rates through a transparent process supervised by the Latvian Chamber of Commerce and Industry, by the Employer’s Confederation of Latvia and by the unions. Finally, like Slovakia and Slovenia, Latvia must initiate a special program of incentives to attract foreign direct investments, like Slovakia, Slovenia and even Finland.

These are only some examples of possible policies and not a closed system. The  Latvian politicians that captured the state still don’t understand that their survival depends on the reforms to promote real economic development, which are dependent of the establishment of successful competitive business. It’s important to understand that the politicians and civil-servants are responsible for what happen in the country. Also, that Latvia’s problems are the result of the wrong application of the neoliberal policies of the last years. That’s why the solution depends of a new political pact to promote growth, together with the development of a more realistic and sophisticated view of economic development policies, breaking with the ideological neoliberal populism of the last two decades.

1) Riga Stradins University.
2) Near 20% in comparison to 2005. The real exchange rate is the nominal exchange rate taking in consideration inflation. It’s a more accurate indicator than the nominal exchange rate. In this sense, in relation to 2005, the Latvian Lats would be devaluated about 20% against the euro in a free exchange rate mechanism.
3) Concrete examples of countries who adopted a fixed exchange rate and faced serious crisis include Argentina, Brazil and Thailand in the nineties.

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As I have no time to write now, I give you Quino, the excellent Argentinian cartoonist, and a day in the life of a Latvia’s civil-servant. Or of most of Latvia’s universities…

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The general congress of Tautas Partija has taken place today (see pictures of the event on the left and below). In this ocasion, its propositions to fight the crisis were presented. It consists of ten points reflecting the needs/opinions of the people responsible for the current crisis. Generally speaking, they aren’t able to go beyond the paradigms which resulted in the crisis. They don’t present any factive strategy of development, rather believing that structural reforms aren’t necessary. Below there are my comments for each of them.

1) It’s necessary to stop raising taxes

By one side, that’s true. By other, the question is not about rasing taxes or not, but about tax reform. They didn’t understand that this discussion is innocuous. In Latvia’s case it’s necessary to alleviate the taxes of households and of the productive sectors (including investments in new equipments), while increasing the taxes related to speculative activities, including real estate. Also, there is necessary to tax land and property, although the tax system must rely on differentiated rates between productive and unproductive. Profits of the productive sector must be taxed, but not much.

2) It’s necessary to increase the corridor of the lats, until +-15% (the Maastricht criteria)

In Latvia’s case, most probably this would result in devaluation. Šķēle just changed the terminology from “devaluation” to “increase of the corridor”. As my article in yesterday Diena tried to discuss, devaluation without a clear policy to  promote development would be much more negative than positive.

3) The budget of the year 2010 must not have a deficit bigger than 3%

Although this sounds logic, this is questionable and not a simple thing to say. In times of crisis, it’s impossible to predict what’s going on the next months. If the crisis are going deeper, as I believe, it’s going to be impossible. As the Latvian tax system relies mostly in salary taxes and in VAT, with an increase of unemployment (also due to the restructurization of the state apparatus), the collection of taxes are going to go down, make impossible a deficit of 3% without a very radical administrative reform of the state. That’s exactly what Tautas Partija doesn’t want.

4) Parex must be quickly sold, even with losses, with guarantees that the state would not have to invest more money

This is a very naive proposition. By one side, Parex must be profitable before being sold. The international experience shows that usually the government absorbs the rotten part of the bank and sell the good one. We cannot afford that. As we are receiving support form the IMF and the EU, we are not in an emergency and we can wait. So, it’s better to make Parex a profitable bank increasing its market value. Just let’s not to put more money in it.

5) The spending of the state administrative apparatus must be reduced

No doubt about it. However, to do so, it’s necessary the make a deep administrative reform. To do so, it’s necessary to reduce the bureaucracy, to end with the nonsense commissions and with a lot of politicians occupying chairs they don’t have competence to, and the most important, to make the process of decision-making the most transparent possible. Taqking in consideration what happened in Kalvīts’s cholesterol years, that’s exactly what Tautas Partija doesn’t want to do.

6) The EU structural funds must be distributed taking in consideration productivity, energetic efficiency and use of local resources

That’s ok. I’m just afraid they forget to say that the companies of or represented by the Tautas Partija’s members are the most productive, most energetic efficient and the only  ones using local resources.

7) The loans from the EU and IMF must be used to support firms able to export, to guarantee a superavit on the Current Account

Just to remember that this issue was already widely discussed some months ago. Both the EuropeanCommission and the International Monetary Fund publicly assured that this money cannot be used to support firms or whatever different to cover the deficits of the international accounts or the deficit of the government’s budget. I’m just wondering if they are really so ignorant in economic issues and really didn’t know that.

It’s necessary to stimulate investments

For sure. Difficult to not agree. But real investments and not speculation, as stimulated by Kalvīts’s government. Do you remember when Tautas Partijas discourse was that Real Estate and credit from foreign banks are a guarantee of economic development forever?

9) The system of social guarantees must be corrected, to stimulate people to return to work

First, to people to return to work there must be jobs. After that, salary taxation must be reduced. As the promotion of a real tax reform isn’t part of Tautas Partija agenda, this item is also innocuous.

10) It’s necessary to support specific products and not sectors

The objective here is clear: these products must be those produced by the companies of the party’s members. For example, milk, furniture… They just didn’t have courage to publicly say that the best would be to support specific brands, as for example “Valmieras piens”. Again, the objective is to get the most possible money from the state to their private companies. They aren’t interested in real economic development, but to find ways to get money from the state to support their private business.

I could go further and make a more detailed critic to these points. However, they are so  fragile, that I believe it’s not necessary. This points don’t present anything new. They are the expression of the well-known policies of Tautas Partija to capture the state to their own interests. In the next elections, I truly hope Latvian people are going to put away from public life the party that best represent the idea of “kleptoparasitism” in Latvia.

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I don’t have time to post some comments I would like by now. Anyway, here there’s a nice interview with John Kenneth Galbraith. Hope it helps to open minds in Latvia. Enjoy!

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Development has been one of the most sensitive question in economics. However, in the last 40 years it hasn’t discussed properly, as reason gave place to fetish.

The first point is that there is fashion in the Academy and it’s cyclical. Specifically about economics, in the capitalist block we have seen – in the last hundred years – the alternance of liberalism-state intervention-liberalism (don’t want to discuss now Russia and China). If in the 1950s, with exception of Chicago and maybe some other few economic departments, you defended a more liberal oriented view of economics the reaction would be “Witch! Witch! Burn, burn…”. The result was a radicalization of the debate, which had its counterpart in the (neo)liberal revolution of the 1980s. In the last 20 years, if someone defended keynesianism, their reaction would be… “Witch! Witch! Burn, burn…”. The result is that people’s view become fuzzy and distorted by beliefs, and the dialogue turns to be ideological rather than free and creative, how it should be in the Academy.

I concluded that a good definition of “ideology”, among brilliant ones, is that “ideology is when the reality is seen as it should be and not as it is”, which, by the way, is Marx’s definition. That’s exactly what happens in the Academic field. As the fashion in vogue changes, instead of people to construct a dialogue, which requires learning, they go from one extreme to another, defending new ideas like Jesuit missionaries. It’s a process of belief. There’s also a worst one. There are also people who just want to be part of the “top”. Paul Krugman is a good example of this kind of mumbo-jumbo, which Thorstein Veblen explains wonderfully in his “Theory of the leisure class”. People want to be loved, respected, and to feel part of something.

As what happens is the establishment of a system of beliefs, instead of a system of knowledge based on dialogue, the result is the dogmatization of this beliefs, transforming economics in a religion. It’s easier. It’s a process like Hans Albert idea, where “(…) dogmatization expresses the tendency to give the need of intellectual certainty priority over the need to achieve optimal solutions of actual important problems” (Geach. P. T. & Hołówka, J. (1991). Logic and ethics. Berlin: Springer, p. 238). I would go further. Social Sciences in general. Political Science, Sociology, International Relations, in a bigger or lesser degree are affected. The result is that “the model” is more important than reality itself.

That’s why people are so afraid of studying the classics – Smith, Ricardo, Mill, Marx, Schumpeter, Keynes, and many others. By one side, those who know the fundamentals of economic theory, know that the neoclassic/neoliberal approach is a system of beliefs based on a very fragile theoretical basis. Those who don’t, instinctively perceives that are solid problems, but prefer to stay with the beliefs. This also explains why History became stranged from Social Sciences in general, due to the adoption of a neoclassic-economic methodology. History may reveal these problems, so who needs that?

But what is the relationship of the previous discussion with Latvia, to go to the second point?

The Latvian authorities aren’t capable to go beyond the Neoclassical common sense dungeon. They don’t have a sufficiently plural education. They are physicians, engineers, mathematicians with courses of specialization in business or marketing, with some small classes about macroeconomics, posing as economists. The few with a master and/or doctoral degree specifically in economics had studied mainly neoclassical synthesis, making them hydraulic pseudo-economists. They didn’t have a pluralistic education in economics,they didn’t learn economic theory, they didn’t study profoundly (if had studied) Smith, Ricardo, Schumpeter, Keynes. The authors about economic development are forbidden. They are all MARXISTS! Witch, witch! Burn! Burn! They didn’t develop the ability to think independently. They are the result of ideologically hermetically closed theoretical environments, where there’s no dialogue.

Models have their theoretical basis, in other words, there are pressupositions validating the models. When these presuppostions aren’t present the models aren’t valid.  All theoretical models must be verifiable, falsifiable and demontrable. In Latvia’s case, the core models in economics aren’t demonstrable, as Latvia’s economic structure is a falsification. So, Latvia cannot be compared with any country. And that’s the problem. People are still trying to analyse Latvia with models that cannot be used to do so, because the conditions of “economic normality” aren’t present here, invalidating the models. A sad example was some months ago, when asked about Latvia’s economic problems the answer of the head of the European Commission was the predictable discourse: Latvia must to devaluate its currency to boost competitiveness and has to end with the deficits of the budget. No word about structural reforms. Naturally the guy didn’t know anything about Latvia and just reproduced the common sense.

So, about pundits in general, the problem is, as they need to reflect the fashion in vogue, they cannot think critically, at the same time they are usually offering their own version of a consensus. They are not only believers, but they are looking for aproval, as without it they lose public, so they lose income or their job or, at least, their status.

By the other side, it’ s unbelievable that the IMF and the pundits were expecting a fall of about 5% of the GDP. In Latvia’s case, it’s so easy to see that it’s going to be more than 20% for sure and maybe more than 30%. Let’s see the structure of the 2008′s GDP:

Speculation with real estate – 17,6%

Consumption of durable goods: 17,3%

Financial Intermediation: 6,3%

Total: 40,90%

So, how much is feasable to expect the Latvian GDP to drop in 2009? About 45%. Maybe not, but something more than 30% still realistic.

While people go on believing that models, as a dogmatic expression of reality, are more important than reality itself, Latvia won’t develop. Instead, it will underdevelop further and further, developing the underdevelopment. As there is a new wave of immigration, what we are seeing now is the end of Latvia as we know. It’s urgent to break the populist neoliberal methodology of the last years and to start to view Latvia as it is and not as it should be. It’s time to deal pragmatically with Latvia’s problems. The first thing to do is the administrative reform of the State, together with a new political pact, where development is the main objective, in detriment of the private interests of the kleptoparasite Maharajas (civil-servants and politicians).

Public Service: The plague of Maharajas

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Dear readers, the boog was down for some time, due to problems with the server. I don’t know what happened. Objectively, the blog appears to be recovered from a backup the host provider had. This means it had rolled back to a previous version and all out discussions about debvaluation are lost (so the article). Anyway, I’ll try to find if I have a backup of that entry to post later today.

All I can say is sorry. Atvainojos par sagādātajām neērtībām!

Popularity: 6% [?]

A revolutionary group in Brazil called MR-8 (Movimento Revolucionario 8 de outubro) because of the day Che Guevara was arrested in Bolivia, still exists and supports one of the worst Brazilian politician, Orestes Quercia. They concluded that Quercia is the only one able to make things in Brazil so bad, that people will end their passiveness going to fight and, thus, making the socialist revolution. See below Orestes Quercia’s reaction when asked about illicit enrichment on Sao Paulo’s TV Cultura interview show “Roda Vida”. It’s like Dombur’s show in Latvia, with the difference that the politician is only one and there’s a team of journalists to interview him/her. He had a very aggressive reaction calling the journalist “caluniador” (slanderous), “mentiroso” (liar), “canalha” (scoundrel), “safado” (barefaced).

Thinking about Latvia’s current situation made me to conclude that the Latvian political elite is an arm of the MR-8, deeply commited to the destruction of Latvia as we known. Ok. I’m joking. But, anyway, the result of the elections isn’t showing a problem of political crisis or lack of democracy, as these things always have existed. It’s showing that the torpe political project of the Latvia elite, based on the peculiar Latvian notion of liberalism, whose rhetoric expression is the banalization of the concept of “populism” to justify the fact that the government exists to serve the politicians and not the people, has failed.

The parties who could break this vicious circle, are afraid to do it, to not be called “populist”. Anything different from the actual political model, where the State exists to serve the politicians and not the people, is called populism by the media, by the intellectual pundits, and even by some of the universitary/academic staff. The level of banalisation of the term is so absurd, that anything different from the Latvian closed political model based on its peculiar concept of liberalism is called “populism”, even academic papers. It happened with myself. I’ve presented a paper on a conference, stating that Latvia was underdeveloping and not developing, that a crisis was coming and that the politicians were responsible for it. Touché! It was criticised by the Latvian academic elite as a “populist” paper. So, to say that politicians are responsible for what’s going on in the country is populism. I would be very happy to receive critics about my theoretical choice, the way I conducted the research, as these critics are good to make my essay better. But, to call it “populist”, I’m sorry, but I have to answer in the same terms: It’s methodological populism (besides, I know the guy who criticised my essay didn’t read it).  

The point is that real populists have chance to win elections, because no-populist parties are afraid to offer policies that, although considered normal in Western Europe, in Latvia are considered “populism”. And so, everybody in choir, “populism”, ”populism”, ”populism”… Yeah… The Swedish model… POPULISM! German autobahns… POPULISM! Decent health care to people… POPULISM! Politicians are responsible for what is happening on the political arena… POPULISM!  Good schools for children… POPULISM! Politicians alienated from the voters… Ops! That’s not populism. To use the State to personal enrichment… Ops! That’s not populism. “Hummm… How to criticise these things, if we can’t use the word populism”.  Taking in consideration the level of banalization of the term, I’m inviting everybody to use the word populism to everything:

“I watched Fellini’s Amarcord again last week and I didn’t like it as before”. “Why?”. “Because, you know,it’s sooooo populist.”

“Hey waiter! Another beer please. This time not so populist. A colder one!”

“I had a horrible meal yeaterday. The meat was so populist”.

“Not now, dear. I have a very populist headache”.

“Jānis invited me to go to the country side, but I’ m thinking I’m not going. The roads are so populist there, that I’m afraid about my car”

“Diena’s wine guide: ”It’s a populist Burgundy, the Toronto Argonauts football field after a fresh mow on a crisp October morning, where leprechauns are sleeping after an orgy: not very herbal, bad acidity, although touches of wood and gooseberry are present, helping to reduce its populism.”

The idea is that only the total banalization of the term may give back its original meaning. Click here to read the definition of “populism” by the Macmillan International Encyclopedia of Social Sciences. Following the need to not take populist actions, the Latvian government just announced the budgetary cuts to next years: they aren’t populist. They’re sooooooooo IMF! Poor Latvia.

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