Economy & Trade, Europe, Financial Crisis, Headlines

Q&A: ‘We Were Very Good Students of Neo-liberal Ideology’

Zoltan Dujisin interviews Hungarian economist ANDRAS INOTAI

BUDAPEST, Dec 19 2008 (IPS) - A region that has enthusiastically embraced free market economics since the collapse of state socialism is facing new socio-economic and political challenges.

Dr. Andras Inotai, director-general of the Institute for World Economics of the Hungarian Academy of Sciences, says countries of Central and Eastern Europe (CEE) that have not oriented themselves exclusively to the West may have a better chance to adapt to a new economic reality.

IPS: How will the post-communist countries in CEE react to the global financial crisis? Andras Inotai: There will be an evolving macroeconomic crisis, with the deepest depression since World War II and a deceleration of growth rates which in CEE were around 4 to 6 percent. This will have social implications with losses in health and pension funds and the stock exchange.

IPS: What are the causes of the expected halt in economic growth? AI: The crisis may hit individual CEE economies differently. The economies of the region had not only different growth rates but also different engines of growth. Domestic consumption, investments and exports were the three usual factors for economic growth.

In south-eastern Europe the main driving force was domestic consumption, and the crisis will hit them hardest. The Czech Republic, Slovakia, Poland and Hungary were benefiting from export growth and their future depends on the main exports markets, but Western Europe is the largest market for these countries.

IPS: But Western Europe is going into recession… AI: The Czech Republic, Slovakia and Poland are deeply integrated in the German market, much more than Hungary, therefore the German recession will have a larger impact for them.

It is important to see what will be the answer from big car manufacturing companies. They have more competitive subsidiaries in CEE, and if they cut production the question is where. If German taxpayers give billions of euros to save a car manufacturer, they won’t want that money to go to the Slovak subsidiary, even if it is more competitive.

IPS: Which social groups are more at risk in this crisis? AI: Interestingly, not those employed by the private sector, but the public administration and public services that remained state-owned enterprises, such as railways, urban transportation and health sector. But the most dangerous consequence of the crisis, particularly for Central Eastern Europe, could be an ideological crisis.

IPS: What sort of ideological crisis? AI: With a deep recession, declining income and higher unemployment, there is fertile ground for populism, demagogy, nationalism and extremism, and in all countries in the region you will find politicians who will gladly use this opportunity to seize power by promising a country of honey and milk with no special sacrifice.

IPS: In Ukraine the internal political struggle has been postponed to face the crisis. AI: This would be the reasonable answer to a crisis situation, to stop political and ideological polarisation and join forces. But I am doubtful that many big political parties are ready for this.

IPS: What difference can social cohesion make? AI: A society with a high level of solidarity is more likely to avoid high costs in the crisis. But if each social group starts playing against the other, and if the domestic political environment becomes uncertain, we will only aggravate the situation, particularly in CEE where divisions are strong.

IPS: Where should government support go? Many are speaking of aiding small and medium enterprises (SME). AI: Governments should do everything to avoid deepening the crisis, but the different groups must understand they should take part of the burden for the crisis. One area of government support is in physical infrastructure: railways, highways, bridges, ports, environmental protection, where there are tasks that need to be done, and now you can accelerate the process just to create new jobs for people. These investments will become profitable, maybe not in the first year, but surely in the future.

However, I fully disagree with plans to give money to those SMEs which are not and will never be competitive; money could disappear in the pockets of so-called entrepreneurs who are only directed by a tax cheating mentality and getting government subsidies. We just cannot afford this luxury anymore. We must only give money to those companies that prove to be competitive.

IPS: State intervention and ownership is likely to grow everywhere in the world; what will happen in countries such as Poland, the Czech Republic and Slovakia where free market ideology has played an important role? AI: The current crisis and state interventions in the United States and Western Europe constitute a very bad message to those countries that in the last 20 years were trained and influenced by neo-liberal ideas. CEE was a very good student of this neo-liberal ideology, and now we see that this ideology may have created the crisis.

I would be a bit careful with this assessment, but we did criminally ignore the lack of regulation of global financial markets. State regulation, not direct intervention, is necessary. If this regulation is done at the EU rather than the national level this will be good because it will deepen European integration, but at the moment there is a danger that everyone does something at the national level.

IPS: The Slovak government recently warned companies not to lay off employees, adopting a tougher language towards businesses in a country where car manufacturing is crucial. Is this signalling a new relation between businesses and politics in the region? AI: Yes. This can easily lead to the strengthening of national economic policies at the expense of European economic policies and European integration, but it can also create nationalist ideology. When living standards are going down, people will be more impatient and they will be quick to blame someone; not their own governments but Brussels, the Americans – to some extent this is justified because the crisis started there – international financial circles, the New York-Tel Aviv axis, Russia and Germany, or their neighbours. You will always find an enemy.

IPS: There are fears in Hungary and Ukraine, where national currencies risked collapse, that the substantial IMF loans provided may have dangerous conditions attached. AI: We don’t know the exact conditions. The main requirement is that the process of cutting budget deficits should not be brought to a halt. The best is if we don’t use these loans at all, they are an umbrella, a message to investors that the government will fulfil its tasks. It only makes sense to use this loan to pay back credits with higher interest rates than that of the IMF’s money.

IPS: But citizens from CEE do not trust the political class, and tend to see it as corrupt. Are there reasons to worry about where this money will end up? AI: There has been a clear counter-selection concerning the political elite. If they lose their position as a politician most of them cannot do anything, either they don’t have a diploma or it is outdated, and that’s why we have so many ‘survival politicians’, playing the most immoral games to maintain their positions.

IPS: The region has also been known for its Atlanticism. Will the crisis have geopolitical implications? AI: There are geopolitical implications, but not as a result of the crisis. The crisis is to some extent a consequence of the already advancing shift in global geography. China and Asia in general have become the growth centre of the global economy, the Transatlantic region is no longer the centre of future growth.

IPS: For those countries that did not look only westwards, there may be a possibility to export to emerging economies. AI: Much will depend on their capacity to reorient exports to countries with markets that are still growing. China, the Balkans, the Arab countries, India, the Far East and Russia could become new targets of CEE exports.

Poland and Hungary have been very successful in exports to Russia, and Hungary was the leading regional exporter to China, whereas the Czech Republic and Slovakia rely very much on EU markets, and I don’t know to what extent they will be flexible to go to other markets as well.