Monday, 22 October 2012

Are We Really All Keynesians Now?

Compare the following two statements made by PM Donald Tusk to the Polish parliament over the past year:

November, 2011: 'I do not hide the fact that the aim is to stabilise the financial situation of Poland. This is positive for the reputation of Poland and connected to the security of our bonds.'  
October 2012: “The world and Poland face another difficult year. The primary goal before the government is to protect people from the consequences of the crisis.”     

The change in emphasis, less than a year into the second term of the PO government,  is striking. It reflects a move from prioritising reducing public debt, through cutting government spending, towards increasing public investment in order to instigate economic growth. Considering that PO is considered to be the country’s main liberal economic party, is it possible to claim in Poland that we are all Keyensians now?

The phrase We are all Keynesians now dates back to the 1960s when the basic premises of Keyensianism were accepted in North America and Western Europe. Of course much has changed since then. The post war consensus was dismantled and following the end of the Cold War a new neo liberal hegemony took hold that dominated economic thought on the left as well as the right. 

Despite living though the greatest economic crisis since the 1930s, the ideologues of liberal economics have continued their offensive. Whilst the banks and financial sector received huge state bailouts, governments have been expected to cut their spending on public services and social benefits , further deregulate labour markets and push down wages. The policies of austerity are designed to shift the burden of the crisis onto those that did the least to cause it and have deepened the economic downturn, causing further social disorder and political instability. 

The balance sheet of the past few years is that the economic crisis has been most pronounced in those countries where the policies of austerity have been most severe. This stark reality has even led to the director of the IMF, Christine Lagarde, suggesting in recent days that governments should consider slowing the pace of their austerity programmes, due to continuing suppressed economic growth.

It is in this context that Tusk, gave a major speech to parliament last week during a self-induced vote of no confidence. Following the end of the major investment programme in the run up to Euro2012, the Polish economy has entered a downturn. This has been driven by a collapse in the rate of investment, that fell from nearly 10% in the 1st quarter of 2011 to under 2% in the 2nd quarter of 2012. As a result economic growth has slowed, unemployment risen and real wages dropped. In turn the PO government is trailing in the opinion polls for the first time since it came to power in 2007,  only 28% of Poles say that they now supportthe government and there has been an upturn in street protests organized both by the opposition and trade unions. 

After winning a second term in office last year it seemed that Tusk and his party were both returning to their ideological liberal roots and coming into line with the accepted economic orthodoxy of austerity. However, Tusk’s recent speech to parliament has shown that there is now a change in emphasis and that the government is considering increasing its own investment in order to stave of an economic recession. 

Tusk announced large public spending on areas such as highways, rail modernisation,the  army, power plants, a natural gas terminal and new pipelines. He announced that over the next few years Poland would spend around 220bn zlotys ($70bn), although some of this was recommitting the government to previous spending plans. 

The major part of the funding for this investment programme will come out of funds from the next EU budget, that comes into force from 2014. The government is estimating that this will add up to 300bn złoty (although this of course has not yet been negotiated), with the rest of the money gained from financial institutions, the state budget and private and state companies.

Importantly the government has announced that it will bridge the gap before these funds from the EU begin to arriv,e by increasing public investment from the beginning of next year. It plans to use the state-owned BGK bank to set up a 40bn zloty investment fund, which will be supported by the largest state controlled companies. This will be used in order to encourage private sector lending for big infrastructural projects and it is hoped that over the next six years it can be leveraged up to  90bn zloty. 

Of course the usual suspects on the sidelines have criticized the government for breaking with liberal economic orthodoxy. However, these are now isolated voices on the sidelines, with the political majority recognising that only further state investment can prevent a serious economic downturn. 

The change in economic strategy, announced by the Tusk government, of increasing government investment is to be welcomed. However, the details of the government’s plans are as yet unclear and the exact sources of finance uncertain, particularly as they rely upon encouraging private investment. The major test will quite simply be whether they result in an increase in the rate of investment in the country or not.

 A further point is whether the investments will be of a type that will be in the best interests of the Polish economy and society. The announcement that a large proportion of the money will be spent on modernising the army indicates that this may not necessarily be the case. Importantly, the government has not presented a programme of public investment tied to solving the country’s major social problems.

In particular this concerns increasing the very low rate of employment in the country. Keynes, as well as his Polish predecessor Kalecki, placed the question of full employment at the centre of his general economic theory,  writing in his  magnum opus (The General Theory of Employment, Interest and Money) that : ' The central controls necessary to ensure full employment will, of course, involve a large extension of the traditional functions of government.’

Yet, despite the inflow of EU funds over the past few years, alongside the large outflow of young workers from the country, unemployment still remains around 13% in Poland and only slightly 50% of the workforce are active on the labour market. Almost every social and economic problem in Poland (from negative demographic trends to underfunded public services) can be attributed to the extremely low level of labour activation. However, the government has failed to present any coherent plan to improve this situation. Nor has it linked its programme of public investment to improving the drastic situation in the health service, nor improving the worsening housing situation though instigating a programme of house building. 

The change in government policy should be welcomed and seen as a positive reaction to the country’s growing economic difficulties. However, this will ultimately be judged according to both by the size of investment programme and also by whether it results in an improvement of the living standards and quality of life of the country’s citizens.


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