Monday, November 22, 2010

How not to handle the economy

The best way to explain the Irish crisis is to explain it in very simple terms.

Suppose the economy is divided in two groups: the haves and the don't-haves. The haves have big bank accounts, shares and other possessions; the don't-haves are dependent on their wages.

Now some big bank goes bust. The consequence is that as a country we are a bit poorer and the question is how this loss should be divided. The logical way to handle this is that the shareholders and the creditors of the bank should carry the burden. So only the haves would pay the bill. They still will be haves but they will just own a little bit less.

But that was not how it worked in the last crisis. Under the excuse that the stability of the financial system was threatened governments took much of the burden upon them. But as the government doesn't own much of itself this means that in the end everybody in the country - both the haves and the don't-haves - will have to pay the bill. But as the don't haves are financially weak and the haves have ways to evade taxes this brings the government soon in a very difficult position.

In Ireland the government had taken full responsibility for a bank that had lent much money to real estate developers and that fell into problems when real estate prices cratered.

Socialists like to scold the capitalist way of thinking as "privatize the profits, socialize the loses" and in this case this is exactly what we have done. The problem is that until we recognize what we have done and that it is unsustainable we will keep running into problems like Ireland has now.

As can be seen in this article ("IMF: Markets Significantly Overestimate Risk of Advanced Econ Default"), the IMF still hasn't gotten the idea when it states that the main problem is "primary fiscal deficit". That is not true. Those deficits are in most cases a direct consequence of governments taking on debts from the private sector.

Governments should not take on any debt from the private sector and if needed pressure for liquidation so that the property relations reflect the economic reality. In times of crisis it needs all the means it has to compensate for falling tax receipts and to stimulate the economy.

A similar reallity rule exists for wages. A country can not live above its means in the long term. This applies also to stimulation of the economy. Stimulation of the economy should concern things that add to the economy like new roads or product development. This disqualifies everything that does not add to the economy: too high wages, new roads that are not needed or bank rescues.

Friday, November 19, 2010

The precedent excuse against partition of Kosovo

Last week several reports appeared about the Western Balkans. See here for an overview.

It is good to see that after the International Crisis Group also an article in Survival, the journal of London’s International Institute for Strategic Studies saw some merit in partition of Kosovo.

On the other hand however, Daniel Serwer of the USIP once again published a report and an article in which he attacks the option of partition as a way to settle conflicts in Kosovo and Bosnia. He seems a bit confused about the subject sometimes - he falsely claims for example that the recent UN resolution on Kosovo asks for technical talks only - but as his institute is directly financed by the US Congress we have to take him seriously.

According to him if borders were changed in Kosovo this would "open up border questions" in Bosnia and Macedonia and likely also in Albanian inhabited areas in southern Serbia and Montenegro. It is a modern version of the Domino Theory and just as dubious when you have a closer look:
- when Kosovo declared independence there were also people who predicted that that would lead to the secession of the RS in Bosnia. Nothing happened as everyone knew that the Western countries wouldn't allow it. Similarly when Czechoslovakia split and there were some border changes between Czechia and Slovakia nobody even suggested that that would or should have consequences for the Hungarian minority in Slovakia. So there is no reason to suppose that a border agreement between Kosovo and Serbia will have automatic influence on Bosnia and Macedonia.
- The solution in Bosnia has always been obvious: extend the principle of self-determination - on which Dayton is based - to the Croats. Unfortunately by pressing the other way the West has created a hostile stalemate. The longer this lasts the lesser the chance that Bosnia will survive as a state. This has nothing to do with Kosovo.
- A major factor in Albanian separatism in Macedonia is the belief that the US (and to a lesser degree the EU) is an ally of the Albanians against the Slavs. Both in Kosovo (1999) and in Macedonia (2001) the West intervened in a war started by the Albanians and then imposed major changes in favor of of the Albanians. A refusal to change borders in Kosovo - despite the sorry position of its minorities - only strengthens the impression that the West supports the Albanians no matter what they do. The recent weapon catches on the Kosovo-Macedonian border show that preparations for another war are already going on.
- not changing borders has consequences too. In Croatia not changing borders - and just as in Kosovo refusing to discuss real autonomy - led to a war and in the end some 400,000 permanent exiles. At the moment the position of Kosovo's minorities is so bad that it is generally expected that those remaining will gradually leave when the situation doesn't improve. This soft cleansing has an effect that is more destabilizing than border changes.

The Poland-Lithuania conflict

The Economist had a little article about the recent diplomatic row between Poland and Lithuania. On the surface it is only about the right of the Lithuania's Polish minority to write their names with the Polish alphabet. But as can be seen by the enormous number of comments (326 at the time I write this) there must be a lot of underlying frustration.

Buying elections

As I mentioned in previous posts about the color revolutions, the US subsidizing parties in the former communist countries through its NED (National Endowment for Democracy). Other Western organizations (political parties, Soros, etc) are doing the same. Although there is nothing wrong with explaining to newly democratic countries how democracy is supposed to work in practice this means that "pro-Western" parties are supported while parties that are despised as "nationalist" or "pro-Russian" or "communist" are not. So in fact we are buying votes - exactly the reason why nearly all Western democracies frown upon or forbid foreign donations to their political parties.

Now it looks like the Russians are learning the game too. The following is a fragment from a story about Moldova:

There will be an election Nov. 28. The country has billboards with various candidates all around and rallies throughout the country. Western nongovernmental organizations (NGOs) are there. Some are funded, we were told, by the American National Endowment for Democracy, others supported by NATO and so on. The Russians, too, have learned the NGO gambit from the West by watching the various color revolutions. Russian-supported NGOs are in the country, and as one journalist told me, they are serving wine and cheese to young people. That appears to be having an impact.

Postscript: another trick used in Russia is the use of opinion polls. Just like both democratic politicians worldwide and many dictators Russia's leaders look at opinion polls to look for clues on which which subjects they could increase their popularity. I gives me mixed feelings. On the one hand it is good that Russia's leaders are at least somewhat listening to the public. On the other hand it distracts from what really counts and it leads to people like Tony Blair and Obama where polls and power games seem more important than reaching political goals.