‘The Economist’ is wrong about Estonia. It is not doing so well…
from Merijn Knibbe
According to Alan Greenspan (2007), deregulated labor and capital markets enhance the ability of an economy to prevent and overcome economic crises… He was more than a little wrong on the prevention thing. But was he right about the ability of deregulated economies to cope with the consequences of a crisis? Some of the countries which, led by tinkering social engineers of neo-liberal faith, embraced the low taxes/flexible markets doctrine most fully were the ‘BELL’s’ : Bulgaria, Estonia, Lithuania and Latvia. Even their cure for the crisis was neo-liberal: austerity in stead of devaluation. According to ‘The Economist’ of june 16-22, p. 30, this paid off and especially Estonia is doing quite well, at the moment. But is it? Strong export growth, mentioned by ‘The Economist’ is countered by strong import growth and deficits on the current account are, according to Eurostat, even increasing (first four months of 2011)… And let’s take a look at industrial production, which is one of the most cyclical sensitive of economic sectors. Did industrial production grow especially fast, in the BELL’s, enabling them to export more and to pay off their debts? No, it didn’t (graph 1, arithmetical averages). Already after 2005
* production grew less fast than in the other transition countries as well as in Turkey
* the 2008/2009 slump was deeper
* it lasted longer
* and recovery was less vigorous.
A loose/loose/loose/loose situation. For the sake of comparison I added Turkey, a country with a comparable level of productivity and wages and a slightly comparable geographical situation, albeit with a much older, deeper and very vigorous enterprising tradition – though the timing of the cyclical patterns are surprisingly comparable, structural developments do show large differences between these (groups of) countries, which indicates that structural differences do matter.
Data: Eurostat. Cz: The Czech Republic, Hun: Hungary; Rom: Romania; Pol: Poland; Sloven: Slovenia; Slovak: Slovakia;
When we look at this in more detail and compare individual countries (as ‘The Economist’ does) the same pattern stands out. And yes: the BELL’s, those neo-liberal prodigies, are the bottom countries, since 2005, of the entire club of Eastern European EU countries and Turkey. Even Estonia, the supposed exception, is comparatively speaking not doing too well while Bulgaria, Latvia and Lithuania did outright bad. And even Estonian production growth seems to have run out of steam since January (industrial new orders show a comparable pattern). Poland, Romania and Slovakia did so much better – and are, as yet, not running out of steam.
Let’s be clear about this: these last three countries also embraced markets. And the present run up is produced by private companies which are exporting to the rest of the EU and the world and which benefited from direct investments from abroad. Polish success is, also, a success of markets. But there seem to be more kinds of market societies than just the deregulated ‘there is no such thing as society’ Thatcherite one. Thatcherite societies in fact seem to come last, at the moment, as deregulated capital markets led to high levels of private as well as company as well as public debt… Summarizing: Greenspan was wrong, too, on the assumed superior ability of deregulated ‘small society’ societies to overcome economic crises… The point is – I also do not have too much trust in the ability of governments to do this (though Bernanke did well, back in 2008)… Let’s just muddle through, to borrow the Colander line, and in the meanwhile rule in those banks – and emolish the weird neo liberal idea that managers make companies work, while other wage laborers are interchangeable and managers should have the power to fire at will because otherwise great evil may occur to society – the facts show something else.
P.S. unemployment in the BELL’s and surely in the Baltics is still among the highest of the entire EU.
P.P.S. ‘The Economist’ shows a graph which includes Fitch credit ratings of the Baltic economies. Oops. Long ago, i.e. before 2008, my pension fund invested in highly Fitch rated USA mortgages, which is one of the causes that I will have to work four or five years longer than my pension fund promised me, at the time.
P.P.P.S. – people still seem inclined to lend to the USA, despite the debt ceiling talks. Either these people are totally, totally stupid (which they aren’t) – or we are indeed experiencing a liquidity trap. Fun fact: Greenspan already mentioned the glut of global saving driving down interest rates in 2007 – and yes, P.K. did already warn about the possibility back in 1998.
P.P.P.P.S. – the 8,5% GDP growth rate of the Estonian economy which is cited by ‘The Economist’ is unlike those for other EU countries not corrected for working days which means that a corrected growth rate must have been about 7%, correcting for January 1 in 2011 and 2010).
Greenspan, A., The age of turbulence. Adventures in a new world (New York, penguin press, 2007).