Wednesday, 27 October 2010

And What if the People Don't Want Reform?

Witold Gadomski – who writes for the daily Gazeta Wyborcza - is one of Poland's leading economic commentators and a consistent defender of neo-liberal orthodoxy. Yet, despite his clear ideological convictions, his articles are always worth reading as he is an incisive analyst, who is prepared to tackle complicated and controversial issues head-on. His article in last weekend's Gazeta Wyborcza ('And what if the electorate doesn't want reform?') is a case in point. In this article Gadomski compares the current situation in France and the UK as a means to analyse the policies being pursued by the governments in Poland and Hungary.

His thesis is simple: public finances and debt have spiralled out of control and if governments do not start drastically reducing spending then their countries will soon face economic ruin. This challenge has been taken up by the governments of France and Britain. However, while in France the trade unions have responded by paralysing the country through strikes, demonstrations and blockades, Gadomski notes, rather prematurely, that the response to Cameron's announcement of austerity in the UK has been relatively mooted.

Gadomski concludes that Cameron offers the best example of how to carry through painful economic reforms. He argues that Cameron was clear about his intentions prior to the election and that he then began introducing them at the beginning of his term in office. Gadomski therefore predicts that by the time of the next election, the pain of taking the medicine will have worn off and its positive effects begun to take effect.

There are two obvious errors in this analysis. Firstly is that Cameron's Conservative Party does not govern alone in Britain, but is in a coalition government with the Liberal Democrats. The Tories were unable to win an electoral mandate for their austerity programme and the Liberals did not include such drastic spending cuts in their manifesto. Consequently the Liberal-Democrats have clearly broken from their election pledges on issues such as student fees. Secondly, the assumption that such spending cuts will both bring down public debt and reignite the British economy is highly dubious – as clearly shown in the example of Ireland. Figures have just been released in the UK showing that the higher than expected economic growth of 0.8% in the last quarter mainly came from an increase in construction, spurred by public spending. It is likely that the Tories' policy of rapidly retrenching such spending will depress the recovery.

Gadomski then turns his attention to the situation in Poland and Hungary. They are both governed by right-wing parties, which – in the opinion of Gadomski - have been reluctant to carry through spending cuts. Gadomski describes how the ruling Fidesz party came into government in the wake of the collapse of the Socialist led government, following the outbreak of the financial crisis. Shortly between the ending of the Socialist led government and the election of Fidesz, a non-party administration introduced a series of severe spending cuts. Fidesz won the election both promising to improve public finances and reduce the scale of spending cuts . In Poland, Citizens' Platform (PO) had previously (in 2005) promised a set of extensive liberal reforms, such as introducing a 15% flat tax rate for income tax, business tax and VAT. By the time it won power in 2007, the party had toned down its economic liberalism and even promised to raise public sector wages.

The message of Gadomski's article is that these governments should speed up their efforts to cut public spending. In Hungary the government has recently been elected and therefore Gadomski argues it is in a particularly good political position to do this. However, the Hungarian government has already announced large spending cuts – in order to meet its debt repayments to the IMF (Hungary was the first country to turn to the IMF in the wake of the financial crisis). The government has already introduced a 29-point saving plan that includes cutting and freezing the salaries of public administration workers; cutting sick benefits by 10% and increasing VAT to 25%. Presumably Gadomski would also welcome the government's decision to introduce a flat-income tax rate - although quite how this will help public finances is unclear.

In Poland the situation is different. The next parliamentary elections are in 2011 and liberal commentators such as Gadomski would like PO to speed up its austerity measures now and include a clear programme for reform in its next manifesto. Those in government are reluctant to do this, with the Polish Finance Minister, Jacek Rostowski, quoted in the article as saying: 'what is the sense in carrying out reform if it will just lead to the collapse of the government and our successors will resign from it?' Prior to being in government Rostowski was a clear supporter of speeding up liberal economic reforms. Gadomski bemoans the fact that once in government he has become more concerned with political-economy, than with the pure world of economics. However, once again, it is not the case that the Polish government is not carrying through liberal economic reforms (as noted in this blog). These are just never enough for the likes of Gadomski.

It seems likely that the PO government will follow the Cameron example half-way. He will diverge from the British Conservative Party by not clearly laying out a programme of severe cuts before the election. However, it should be expected that soon after forming a government (if indeed it achieves this) PO will then look to implement its intended reforms rapidly, especially as they have their own man now safely encossed in the Presidential Palace. The left should be aware of this and make its opposition to it a centre-point of its election campaign in 2011 – especially as it is likely that PO will be seeking to form a coalition government with the Democratic Left Alliance (SLD) if it does not achieve an overall majority. SLD leader Grzegorz Napieralski should seriously consider the consequences of such temptations and ponder whether he really wants to end up as a Polish Nick Clegg.

Another element of Gadomski's article is his criticism of the Polish and Hungarian Prime Ministers – Viktor Orban and Donald Tusk – for their attitudes towards foreign capital. He notes how these leaders have begun to build upon dissatisfaction within their societies towards the actions and dominance of foreign private capital in their countries. Particularly disconcerting for Gadomski, is Orban's proposal to introduce a 'crisis tax' on banks, the energy sector, telecommunications and trade, which would hit foreign capital the hardest. Concurrently, Gadomski accuses Tusk of playing games of 'economic patriotism' – through supporting the creation of 'national champions' through proposing to create state conglomerates in some sectors (such as energy and finance) to compete with foreign capital.

The reaction of neo-liberal commentators and lobby-groups to any recommendations limiting the power of foreign capital is revealing. For example, in recent months there has been some discussion in Poland about the bank PKO-BP – in which the state has a majority share – buying the fourth largest bank in Poland BZ WBK, which is owned by the Irish investment group AB. This would be a reverse from what occured in Polish banking throughout the transition, which resulted in over 80% of all banking assets in the country being held by foreign banks. However, even this modest step in the other direction, which would help to consolidate a domestic banking system in Poland, has been fiercely denounced by the usual sources. The situation in Hungary is even more pronounced – where foreign capital was largely given a green light in the privatisation process. The country first suffered a financial crisis in 1998, after a flight of capital out of the country revealed the vulnerability of Hungary in the global economy. With Hungary severely hit by the global financial crisis in 2008 (suffering its third economic crisis in 20 years), hostility has grown towards the role of foreign capital in the region.

There is a danger that politicians such as Orban will pursue populist nationalist policies in order to divert attention away from the real causes and effects of the economic crisis. It is certainly not the case that domestic captial is always better than foreign capital - as shown during the recent catastrophic leekage of toxic sludge from an aluminium plant, which was the result of malpractices carried out by a privatised company with domestic owners. However, what current events in Hungary and Poland are showing is that the previous course of capitalist development in Central-Eastern Europe has run its course. This was built upon creating the most favourable conditions for private foreign capital in the region. However, the global financial crisis has meant that there is far less foreign private capital coming into CEE - with FDI falling by a half in Poland alone between 2007 and 2009. The countries in CEE that were most severely hit by the financial crisis tended to be small, financialised economies that were most reliant upon foreign capital (e.g the Baltic States and Hungary). Therefore other sources of capital accumulation will have to be sought. While private FDI has partly been replaced by EU money (which in contrast to private capital has actually been used to help build up the infrastructures of these countries) there is also pressure in these countries for their own domestic capital base to be developed.

Gadomski worries that governments in Hungary and Poland are unwilling to take the 'difficult' decisions regarding austerity measures. He also frets that these administrations are introducing policies that will act against foreign capital in the region. He is concerned that the objective laws of economics - that work so well on paper - are being hampered by the distractions of real-politik and the pressures of electorates. Without stating it, Gadomski is repeating the long-held concern, of many liberals and conservatives alike, that the social-levelling concerns of populations, expressed in the ballot box, undermine the rational workings of the economy. Democracy really can be such a pest sometimes.

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