Sunday, 19 December 2010

The Scourge of Unemployment

In the early morning on 14th October on the outskirts of Warsaw, 18 unemployed people were squeezed into a van and driven to illegally pick fruit . The small van was not designed to carry people but goods. The passangers were seated on wooden boxes and planks without seatbelts. All 18 died after the van collided head-on into a truck. The incident highlighted the desperate conditions that millions of Poles live in and the exploitation they face when they try - often illegally - to earn some money. The major cause of this poverty and desperation is the extremely high level of unemployment, that has been a constant feature of life in postsocialist Poland.

In 1988 there were 21.8m people of working age and 18.2m of these, 83.5%, were in paid employment. 14 years later, when unemployment was at its peak, the number of Poles of working age had increased to 23.6m although the numer of these working had decreased to 10.4m, i.e 56%. Around 1.2m of these were students meaning that around 9m Poles of working age were neither working or studying. During some years, throughout the past 20 years , unemployment has reached 20% - two and a half times the OECD average. The average rate of unemployment during the past two decades stands at 14.3%.

During the past 20 years the unemployment rate has undergone periods of increase and decrease. These can broadly be categorised into five phases:

1. 1990 - 1993: Following the introduction of the shock-therapy reforms and the mass closure of state industries and farms. By the end of 1993 2.9m people were unemployed.

2. 1994-1997: The SLD-PSL government introduced a more interventionist policy and slowed the economic reforms. Unemployment fell by more than one-million and by July 1998 around 1.7m people were unemployed.

3. 1998 - 2004: Unemployment went through a huge surge - especially during the period of the AWS-UW government when new liberal economic reforms were introduced. By the end of 2000 2.7m people were unemployed, which increased to 3.2m by the end of 2002. Between 1999 and 2001 almost 2000 jobs were lost every working day.

4. mid-2004 - mid-2008: The number of unemployed fell from around 2.9m to 1.5m. This was caused by an upturn in the Polish economy following entry into EU. Most importantly was the fact that around 2m Poles - mostly young - emigrated to Western Europe.

5. mid-2008 - now: Since 2008 unemployment has begun to rise again. This is due to the effects of the economic crisis, which have induced an economic slowdown and also reduced the possiblities of Poles finding work abroad. Unemployment presently stands at 13%.

The major cause of poverty in Poland is caused by this high unemployment rate. This is compounded by the fact that only around 1/7 of the unemploymed in Poland receive any benefit. The level of unemployment benefit is extremely low - 601 zł a month, when the minimum social level of existence is estimated at 900 zł. Around 30% of the unemployed have an income below 351 zł a month - which is regarded as the minimum level for existence.

However, the specture of unemployment that haunts Poland is not just a social disaster but is also one of the major barriers to the country's further socio-economic development. If we accept that it is labour and its creativity that creates wealth then we can understand how the inactivity of such large numbers of people is not just a social disaster but also economic madness. Unfortunately the neo-liberal ideoglogues, who tend to dominate economic debate, postulate that the 'natural' unemployment rate is around 8-10%. Even when this figure is not met, then the blame is placed upon the unemployed for their condition, such as their inability to psychologically or culturally adapt to the demands of a market economy (Homo Sovieticus).

Such thinking was able to find some resonance at the beginning of the transition - when unemployment was primarily caused by the closure of state industries and farms. During this time it was claimed that this was a temporary phase and that once the private sector had managed to grow unemployment would fall. The continuation of unemployment could then be explained by the fact that these ex-state workers had been unable to sufficiently adapt themselves to the new reality. However, high unemployment in postsocialist Poland is not a temporary result of the closure of state firms nor can it be explained by the psychological failings of individuals brought up in a different system. Nowadays unemployment is structural and affects different sections of society including the young and educated.

In March this year there were 451,000 people under the age of 25 who were registered unemployed. Furthermore, 17% of these were graduates, with 22,000 new graduates unable to find work. One of the great successes of the transition has been the rise in the number of young people going to university. However, the inability of many of these to find work is wasting the energy and skills of some of the most able people in society. This threatens a new wave of emigration out of the country.

Public debate in Poland is presently dominated by the state of public finances and the need to bring down the deficit. This often focusses on issues such as raising the retirmement age. However, the major structural problem in Poland is the huge numbers of people without work. Attention should therefore be focussed on reducing the once again rising unemployment rate and finding work for those of working age, particularly the young. The returns in taxation (both indirect and direct) would be the surest way to control public finances and sustain a course of economic growth.

Some of the information for this article was taken from an interview with Mieczysław Kabaj from the Institute of Work and Social Affairs.

Thursday, 16 December 2010

Kapuściński's Biographer Wins Polish Journalist of the Year

The surprise winner of the 2010 Polish journalist of the year is Artur Domosławski. He won the prize for his excellent biography on Ryszard Kapuściński. This book was particularly significant for the way it not only portrayed the life and work of a great writer and intellectual but also how it objectively and critically analysed the communist system from a modern progressive left-wing standpoint.

Domosławski has also come to be known as a prolific journalist writing about international affairs - particularly events in Latin America. If I was to have one gripe it would be that he writes very little about what is occurring in contemporary Poland. Perhaps in this sense he is similar to his mentor Kapuściński and it is a sign of how in modern Polish society it is still sometimes easier to write critically and progressively in the mainstream press about things happening in other countries.

You can find the review I wrote about Domosławski's 'Kapuściński - Non Fiction' here.

Friday, 10 December 2010

The Words of a Liberal?

PO's attempt to present themselves as the progressive liberal alternative to the conservativism of PiS has always been dubious. This has particularly been the case when it comes to President Bronisław Komorowski. His 'aristorcratic' background, activity within the conservative wing of the opposition movement during Communism and his declared love of hunting do not identify him as being your typical 'progressive liberal'. These are somewhat offset by his membership of the Democratic Union and Freedom Union in the early 1990s. However, Bronek's liberalism was always more economic than cultural or social.

Old habits die hard, and in a press conference this week with Barak Obama - during his visit to the United States - Komorowski revealled his conservative and outdated opinions when he said:
' If we have to go on a large hunt away from our home, then first we should ensure that our home, our women (sic) and our children are safe. Then we can hunt better.'

Using analogies of hunting and sport when referring essentially to wars in which 100s of thousands of lives have been lost is distasteful in the extreme. Furthermore, his out of date paternalist attitude of protecting 'our women' shows how Komorowski remains a relic of another time. His election slogan was 'we are building Poland'. But what Poland? One where the women tend to the home while the brave men go out to hunt.

During his visit to the USA, Komorowski heaped praise upon the USA - as the beacon of democracy and freedom. All this in the week of the wikileaks revelations and scandals. A progressive indeed.

Wednesday, 8 December 2010

The Hungarian Budget - An Alternative Way?

On the day that Ireland announced an austerity budget that included cuts of unprecedented proportions, Hungary agreed its own budget which offered different solutions to reducing its deficit.

Hungary has been one of the countries worst affected by the global financial crisis. In 2009 GDP fell by nearly 7% and it was one of the first countries to turn to the IMF and EU for financial aid. As a condition of the loans provided by the IMF and EU, the previous Hungarian government was compelled to introduce new austerity measures. Furthermore these came in the wake of the Hungarian government having already reduced its budget deficit from 9% to 3% between 2006 and 2009. Combined, these policies led to the collapse of the unpopular Socialist led government and to the creation of a right-wing administration led by the Fidesz Party, under the leadership of Viktor Orban.

The Hungarian economy has gone through a series of turbulations since the collapse of Communism in 1989. Initially it was declared as the model for emulation as it rapidly opened itself up to the world economy and sold off huge chunks of its industrial and financial sectors to foreign buyers. By the late 1990s, foreign capital's ownership share had reached 63% in telecommunications, 51% manufacturing industry, 36% retail trade and 44% financial services The proceeds from these privatisations were used to fill the public coffers and to maintain political compliance through sustaining social spending. When these privatisations began to slow and the inflow of foreign capital reduced then the imbalances within the Hungarian economy were revealled. In 1998 Hungary underwent a financial crisis as capital flowed out of the country. This was largely as a result of the repatriation of profits by foreign owners and the lack of funds from privatisations after the country's most desirable assets had been sold.

At the beginning of the present crisis in Hungary, the Forint underwent a huge devaluation - falling by 15% alone between October 2008 and February 2009. This again was a consequence of an outflow of captial from the country and helped to instigate a sharp downturn in the economy. A devaluation in the Forint was particularly painful for Hungary as huge numbers of personal loans had been taken out in foreign currencies (particularly Swiss Francs).

The overbearing dominance of foreign capital in Hungary meant that it became the source of frustration for those disastisfied with the realities of contemporary capitalism. This has particularly been the case during times of economic crisis. The involvement of the official left, around the Socialist Party, in pushing through this course of reform has meant that opposition has tended to come from the right. This has allowed for the nationalist-right, primarily around the Fidesz Party, but also with more extreme right-wing versions such as the Jobbik Party, to articulate an 'anti-reform' agenda based upon nationalism, sometimes racism (particularly towards the Roma community) combined with an anti-market/globalisation rhetoric.

The government showed its intentions shortly after coming into power when it announced that the public debt it inherited was actually bigger than it had thought and that it may default on its repayments. This again pushed down the currency, raised the cost of borrowing and ended up with the government soothing the international markets by stating that these claims had been 'unfortunate'. If this was a way of testing the water, then the new administration certainly learnt that it was hot. They have since agreed to comply with the demands laid down by the IMF and EU, to meet their debt repayments and to bring down their budget deficit in line with expectations. How they plan to do this, however, differs from that being carried out in most other European countries.

This week's budget includes plans to introduce large taxes on banks and other firms alongside its decision to bring $14bn in privately held pension assets back into government hands (see previous post). According to the government's calculations this equals around 4.4% of GDP and should help to bring the budget deficit down. At the same time the government has continued with its own public spending cuts, although these are less than in many other countries. In this budget it has also decided to launch a 16% flat personal income tax and a 10 percent small business tax.

It is likely that these policies will meet some positive social appoval as they seem to punish the culprits (large, foreign capital), partially protect public spending and reduce the tax level for local businesses and individuals. The budget seems particularly designed to meet the approval of the middle-class and local small/medium busniesses. However, the government is trying to balance something that perhaps cannot be balanced. The budget does not include a programme of investment in the economy - which ultimately is the only way for the economy to grow. If economic growth slows then its attempts to meet its budget targets will fail. Despite its rhetoric the government is suppressing public spending and meeting the draconian demands of its international creditors. Also the danger exists that it will take individual pension assets out of the pension funds (an action that is wholly rational and justified) but use them to temporarily fill its budget deficit. In this way bodies such as the EU will be pacified through drawing upon the savings of millions of Hungarians.

The solutions being proposed by the Hungarian government are certainly different from those being introduced in countries such as Ireland. However, they do not add up to a coherent alternative solution to the crisis facing many countries on Europe's periphery and carry with them some dangerous ideological undertones.

Tuesday, 7 December 2010

The On-going Crisis in Private Pensions

In a previous post I wrote about the scandal surrounding Poland's private pension schemes. This had been caused by the growing realisation that these private funds were not delivering on their promises. Rather than managing to valourise Polish pensions they have proved to be an elaborate method of passing public money to private companies. The new pensions being paid by the private funds are miserly, even compared to the state-pension, whilst the profits of these companies have been huge. Furthermore, with the government coming under increasing internal and external pressure to bring down its public debt, attention has begun to focus on how passing huge sums of taxpayers money to the private pension schemes is contributing to this burgeoning debt. The defenders of this system are of course now coming out in force to predict Armageddon if anyone dares to interfere with these schemes.

The privatisation of part of the pension system in Poland was introduced by the then Finance Minister Leszek Balcerowicz. According to his adviser, Ryszard Petru (who had responsibility for drawing up the reform), it was brought in with two main purposes in mind:

1. To change the manner in which pensions are counted. Instead of offering a pension at a guaranteed level, it was now to be dependent upon payments and how investments fared on the stock-market. This was introduced in order to encourage people to work longer and harder.

2. To break the monopoly of the state in organising these pensions and create new financial bodies with a steady source of funding. These could then act as long-term investors in the Polish stock-market and be participants in future privatisations.

As an aside, Petru also argues that in the mid-1990s they estimated that the worth of state property that could be privatised would be enough to pay for the debt caused by payments to the pension funds. He then bemoans the fact that the funds from privatisations (which rapidly speeded up during the term of the government he served) were wasted on other things. Now, there is a case against the short-sighted policy of successive governments to sell off state assets to cover their deficits (the present administration is one such culprit.) However, to suggest that such public property could have been sold in order to cover payments to private companies is breathtaking in its cheek.

You will notice that no attention was paid to improving future pensions, despite the huge propaganda of how these would grow on the stock-market. To be honest it would not surprise me if people such as Petru were so blinded by their own ideology (that was particularly prevalent in the 1990s) that they believed this propaganda themselves. Private good, Public Bad - Four Legs Good, Two Legs Bad.

The model for the pension reform in Poland, which was emulated in a number of post-communist countries in CEE, came out of Latin America a few years before those in CEE. Pensions were privatised first in Chile and then in a number of other Latin American countries, including Argentina and Bolivia. The failure of this privatisation to improve pensions and its negative impact on public finances meant that some Latin American governments have returned to a state system.

The first such example was in Argentina, when in 2001 the government confiscated around $3.2bn of pensions' savings before the country stopped servicing its debt (an action that saved the country from economic ruin.) Then in 2008 the government fully nationalised the private pension system (which carried around $25bn in funds) in an attempt to protect retirement investments from the international financial crisis. The government then promised to pay out a set amount to pensioners, with the state social security agency pledging to protect the value of people's investments.

Also, earlier this month, the Bolivian parliament agreed to nationalise the country's pension-fund system that had been created in 1996. The private pension system was declared a failure, by the Bolivian President Eva Morales who signed the bill. Simultaneously a law to lower the retirement age to 58 for men and women (life expectancy in Bolivia is just 65 for men and 69 for women) was also passed, alongside a plan to raise social benefits.

The crisis in the private pension system is now leading governments in CEE to reconsider these schemes. Last year Lithuania reduced contributions to its private funds; in April 2009 Estonia declared that it would freeze pension-fund contributions until the end of the year and in Bulgaria 20% of private vocational pension funds will put their assets under state control until 2014. For weeks now in Poland there has been an ongoing debate (within the government and the media) over the future of the private pension funds. This was sparked by comments made by the Minister of Labour, and supported by the Finance Minister, that part of the payments made to the private pension funds should be taken back and given to the state social insurance scheme. It was also suggested that individuals should be allowed to resign from the private system and pay fully into the state system. This led to divisions and uncertainty within the government, with some vehemently defending the private pension funds. The latest unconfirmed proposal to come out of the government is to reduce payments to pension funds from 7.3% to 5% (i.e. from ZL24bn to ZL16m) and that these payments would not be paid in cash but in long-term pension bonds, which would eventually be bought back by the government.

More drastic measures are being taken by the Hungarian government. Last month it announced that individuals must decide whether they want to invest in the state or the private pension system. Around 3 million workers in Hungary invest some of their pension contributions in private schemes. Those that choose to remain with the private pension system will lose their right to draw their future state system. This will almost inevitably result in the vast majority of people moving back to the state system, leading to the collapse of the private pension funds. Commentators have declared a de-facto nationalisation of the private pension’s schemes, that are worth $14.6bn.

It is not difficult to see that the issue of public debt, swelled by the financial crisis, is the immediate cause of these measures. As much as anything, this is being driven by external pressure from the EU on countries such as Hungary and Poland to rapidly bring down their budget deficits and public debt. However, the EU rebuffed a request last month, from 9 EU members (including Hungary, Poland and Sweden) to discount from deficit figures the amount given to these private funds. Pressure has come from the EU for member states not to move away from the private pension system, with the EU commissioner for economic policy and finance saying: 'it is key that those countries that have introduced pension reform do not withdraw from it.' Whether the EU will decide to compromise on its position not to discount the transfers to the private pension funds from the deficit - in an attempt to save the system - is to be seen.

The potential collapse of the private pension systems in countries such as Poland and Hungary (as well as Argentina and Bolivia) is a sign of how the private sector is no longer able to deliver on the promises it made during the heady days of the 1990s. However, a question-mark remains over what will happen to the large amount of sums that had been transferred to these funds if they are to return to the government. As noted above, the governments of Argentina and Bolivia are using these to guarantee future pensions. However, in Hungary and Poland the impetus is to fill budget gaps and meet the obligations being set down by international institutions such as the IMF and EU. The primary concern for any government, when considering pension reforms, should be how to best provide pensions for its citizens. The private pension funds have failed in this and it is right to change this system and bring money back into government hands. However this should be done in order to more efficiently and safely use people's money so as to guarantee a decent pension in the future.

Friday, 3 December 2010

The Threat to European Unity

There should be no doubt about the seriousness of the present crisis in the eurozone and the European Union. Not only does it threaten the very existence of the euro but it also raises the question about the future viability of the European Union, at least in its present form. The fallout from the global financial crisis has shaken the European economies, further fragmenting the EU into competing blocs with differing interests. A danger exists that European unity will be broken through the richer states breaking from the ideals and practices of cohesion and solidarity that have underpinned the project of European convergence.

There are two major elements to this:


Since the outbreak of the global economic crisis, from the end of 2007, public debt has increased in the EU member states by over 25%. This is a direct result of the economic contraction within the European economies and the huge sums of money that governments have spent bailing out the very financial institutions that were responsible for the crisis.

The effects of the economic crisis have been most sharply felt in the economies on the periphery of the EU, which were most dependent upon an inflow of foreign capital and credit – e.g. the Baltic States, Ireland, Greece, Spain, etc. Those countries that were also members of the eurozone, or had their currencies tied to the euro (such as in Latvia or Estonia), have been worst affected. They have been unable to devalue their currencies, in order to help boost exports, and they are now coming under intense pressure to bring down their budget deficits and levels of public debt, to meet the previously defunct criteria laid out in the Growth and Stability pact. In turn their national governments are compelled to introduce new austerity measures – which only serve to further depress economic growth.

After first striking Greece, the European Central Bank’s ‘shock-doctrine’ has now reached Ireland. The ECB had previously lent the Irish government €100bn, as it had been unable to support its own own banks after being starved of cash due to the very low corporate income taxes in Ireland and the dramatic collapse in its property market. The latest loan to the Irish government is worth €85bn, although it is not clear that this will be large enough to repay all the creditors. All this in a country that was the neo-liberal poster-boy of Europe and whose economic model had been praised as one for emulation by the Polish PM, Donald Tusk, and British Finance Minister, George Osborne.

With most of the bailout money being provided by the EU’s richer countries - particularly Germany, but also the UK - one may think that this shows how the ethos of solidarity within the EU remains strong. However, this loan is being given at a punitive interest rate of 7%, which will therefore see the new creditors receiving a healthy return on their loan. British banks already have £140bn worth of loans in the Irish banks, meaning that it is in the British government’s direct interest to protect them from collapse. All of the money included in the current bailout goes exclusively to these banks and not a cent is being used to invest in the economy, save jobs or protect the country’s ailing public services. In fact the opposite is the case. The bailout has been granted with the proviso that the Irish government introduces a new austerity programme that will cut welfare entitlements, reduce the minimum wage, shrink public sector pay and jobs and slash spending on health (by 7.5%) and education (12%). No wonder that political forces who are offering an alternative economic programme in Ireland are on the rise.

The real fear now is that this crisis will spread to other eurozone countries in Southern Europe, such as Portugal and most worryingly Spain. However, non-eurozone countries in Central-Eastern Europe, such as Poland, are also being affected by this crisis. The latest events in Ireland have resulted in a sharp fall in the Polish zloty, even in relation to the euro. Investors are afraid to locate capital in government bonds in ‘developing’ European countries and are moving out of countries such as Poland. These governments are under intense pressure, from financial markets and the EU, to reduce their budget deficits and public debt. For example, the EU is pressuring the Polish government to bring down its budget deficit from its present level of near 8% to 3% by the end of 2012.

CEE countries such as Poland, that stand outside of the eurozone, now find themselves in a catch-22 situation. On the one hand being outside of the eurozone gives these countries more economic flexibility and the currency devaluation helps their competitiveness. The lure of eurozone entry does not seem as attractive as it once was (although it remains a stated aim of the CEE governments) and it certainly no longer offers the haven of financial security that it used to promise. However, the devaluation of the Polish Zloty is causing other problems – primarily by increasing the cost of debt. Millions of Poles have taken out loans and mortgages in foreign currencies (predominantly Swiss Francs) and any devaluation pushes up the cost of their repayment. Likewise the currency devaluation and rise in government bond yields are pushing up Poland’s public debt towards the dreaded 55% of GDP mark.


The second potential schism in European unity is occurring over disagreements surrounding the EU budget. Immediately these have broken out over the size of EU expenditure in 2011. The proposal by the European parliament to increase this by around 2.9% was agreed by delegations from over 20 countries. However, such proposals have to be unanimously agreed within the EU and so far it has been blocked by an alliance of ‘netpayer’ countries, including the UK, Holland, Sweden and Denmark.

These clashes are just a foretaste of the conflicts that could breakout during negotiations over the size and composition of the next EU budget, that will run from 2014 to 2020. According to reports the UK is currently forming a coalition of net-payer countries with the aim of reducing this budget from the current 1.13% of EU GDP to 0.85% - i.e. by €250bn. These countries would like to set the agenda for the talks at the next EU summit in December – as the Presidency of the EU will be held by Hungary and Poland (i.e. recipient countries) in 2011.

These discussions will not just concern the size of the 2014-20 EU budget but will also focus on how cuts in this budget should be made. It is unlikely that major cuts will occur in the Common Agricultural Policy (CAP) and agricultural subsidies, which take up nearly half of the EU budget. This is partly due to the political pressure of major players such as France, but there is also a more general political reason for this assumption. Agricultural subsidies have been an important source of money for farmers in the EU and have thus helped to retain the dominance of Christian Democracy within many EU states. With such parties presently dominant within most powerful EU states at the moment, we may expect that this status-quo will be preserved. It is therefore probable that the major cuts in the next EU budget will be made through reducing structural and cohesion funds. This money has been used to invest in the infrastructure of the poorer EU regions – first in Southern Europe and Ireland and more recently in CEE (although it should be noted that poorer regions in the richer countries have also been beneficiaries of these funds.) Cutting the structural and cohesion funds in the next budget will be most painfully felt in CEE where the EU's poorest regions are situated. Poland will be particularly affected, as it has so far been the largest recipient of EU funds. Also Romania and Bulgaria - the poorest EU countries - will particularly suffer as they are yet to receive any significant EU money after joining the EU, in 2007, after the previous EU budget had been set.

Following the collapse of Communism, there was no significant investment in the infrastructures of the CEE countries, with foreign investment normally connected to the sale of state assets. It was only after entry into the EU that some direct investment in these countries' infrastructures has occurred, although this has been at a much lower rate than during previous EU expansions. Throughout the past two decades the major Western European economies have made huge profits by monopolising sectors of the CEE economies, opening up these economies to western products and gaining access to a new pool of cheap labour. However, with the economic crisis having moved from the private to the public sphere, the era of austerity is now shifting from the national to the European level. This is undermining the economic basis for the project of European unity and convergence which can only survive if some mechanism of economic redistribution - counteracting the diverging effects of the free-market - is in place. The alternative is to widen divisions in Europe and give impetus to right-wing nationalist and populist forces throughout the continent.