Topic: International Economics and Development

Good News from Hungary

In a recent article for the Weekly Standard, I noted that freedom in Hungary was under attack. In the past several years, the Prime Minister Viktor Orban has tightened its control over media, harassed civil society organizations, politicized the judiciary, nationalized $14 billion worth of assets from private pension funds, and populated the board of Hungary’s central bank by appointees of the ruling party, Fidesz. Mr Orban – who was once seen as a pro-market, liberal reformer – has also become Vladimir Putin’s most reliable partner in the EU, having hosted him for a working visit just last week.

But not all Hungarians are applauding as the country descends deeper into what could be called ‘goulash authoritarianism’. In fact, the parliamentary by-election in the county of Veszprem on Sunday has brought a very encouraging piece of news. A Fidesz candidate was defeated by an independent candidate, Zoltan Kesz, endorsed by a coalition of left-of-center parties.

“The left-right divide has been turned on its head in Hungary; the relevant distinction here is between the pro-Western and pro-Eastern political parties,” says Mr Kesz, referring to Mr Orban’s geopolitical allegiances. It should also be said that Mr Kesz is no ordinary politician. An activist and English teacher, he is the founder of Hungary’s premier libertarian think-tank, the Free Market Foundation. Interestingly, given the toxic political and ideological environment in Hungary, the organization has become known as the leading voice against racism in the country, and much of its efforts have been aimed to counter the rise of political forces such as the xenophobic Jobbik party, which is currently the third largest political force in the country.

Mr Kesz’ election is significant because it brings an end to the narrow supermajority, which Fidesz enjoyed in the Hungarian parliament since the election last year. In 2013, the parliament passed a number of controversial constitutional amendments, and many feared that the unchecked dominance of Fidesz could herald the demise of Hungarian democracy. While Mr Kesz’ electoral victory assuages those fears somewhat, he will be fighting an uphill battle to get his country back on track.

Europe: A Fiscal & Monetary Reality Check

Led by Alexis Tsipras, head of Greece’s newly-elected, left-wing coalition, some other leading political lights in Europe—Messrs. Hollande and Valls in France and Renzi in Italy—are raising a big stink about fiscal austerity. Yet they always fail to define austerity. Never mind. They don’t like it. The pols have plenty of company, too. Yes, they can trot out a host of economists—from Nobelist Paul Krugman on down—to carry their water.

But public expenditures in Greece, Italy and France are not only high, but growing as a proportion of the economy. One can only wonder where the austerity is. As the first chart shows, only five of 28 European Union countries now spend a smaller proportion of national income on government than they did before the current crisis. For example, Greece spent 47.5% of national output on government in 2007 and 58.5% in 2013, an increase of 11 percentage points. 

Government expenditures cut to the bone? You must be kidding. Even in the United States, where most agree that there is plenty of government largesse, the government (federal, plus state and local) still accounts for “only” 38.1% of GDP.

Dr. Krugman Meets Dr. Fox

Dr. Paul Krugman, the hyper-productive New York Times columnist and Nobel laureate, has produced a flood of fiscal factoids. He argues that the only way to put the major economies around the world back on track is to “stimulate” them via deficit-financed government spending.

Most recently, Dr. Krugman has weighed in repeatedly on Greece’s travails with his fiscalist snake oil. His column of January 26th, “Ending Greece’s Nightmare,” makes it clear that he thinks he can deliver an elixir.

Not so fast Doctor. A mountain of evidence shows that the elixir is a fiscal factoid. Never mind.

On Greece: Plus Ça Change, Plus C’est la Même Chose

People keep asking me what I think about Europe’s most recent crisis (read: Greece). Well, my sentiments are exactly the same as they were in April 2012, when my Globe Asia column was titled: “China and Greece – Here We Go Again.”

Here’s what I wrote on Greece: “And if you think the political chattering classes in the U.S. are dangerous, take a look at Europe, where the elites are fighting economic reality with all their might — a fight they will lose. Indeed, they have built an economic doomsday machine. And when it comes to Greece, don’t fool yourselves into believing that the recent huge debt restructuring exercise will allow Europe’s politicos to pull their chestnuts out of the fire. Greece’s annual broad money (M3) growth rate has been in negative territory for every month since February 2010, and it is currently contracting at a fantastic 17.5%. In the words of former President George W. Bush (not Yogi Berra): ‘This sucker is going down.’ You can forget all the calculations and soothing noises coming from Europe.”

Yes. Plus ça change, plus c’est la même chose.

Why Businesses Migrate from Greece to Bulgaria: Smaller Government Is Cheaper

What “prompted many Greek manufacturers to relocate to neighboring Bulgaria” is not just less-capricious regulation, as The Wall Street Journal suggests, but also the much lower cost of government.

Bulgaria has a 10% flat tax on corporate and personal income and a 20% VAT. Greece has a 49% personal income tax, 26% corporate tax, 45% payroll tax and 23% VAT.  Unbearable tax rates drive a fourth of the Greek economy underground while businesses in the formal economy migrate or shut down.

What about government spending (which Keynesian economists call “fiscal stimulus”)?  Government spending in Bulgaria was 35.7% of GDP in 2012, according to Eurostat, compared with 53.7% in Greece.

If the word “austerity” is used to mean excessive frugality in governmen spending, as defined by Joe Stiglitz and Paul Krugman, then Greece is very far from austere.  A rising share of Greek government spending is now going to pay interest on accumulated debt, to be sure, but that is simply past profligacy coming home to roost.

On the other hand, if austerity is sensibly defined as punitive marginal tax rates on entrepreneurship, effort and investment, then Greece is indeed practicing suicidal austerity.

Measuring Misery in Latin America 2014: More Dollarization, Please

In my misery index, I calculate a ranking for all countries where suitable data exist. My misery index — a simple sum of inflation, lending rates, and unemployment rates, minus year-on-year per capita GDP growth — is used to construct a ranking for 108 countries. The table below is a sub-index of all Latin American countries presented in the world misery index.

A higher score in the misery index means that the country, and its constituents, are more miserable. Indeed, this is a table where you do not want to be first.

Venezuela and Argentina, armed with aggressive socialist policies, end up the most miserable in the region. On the other hand, Panama, El Salvador, and Ecuador score the best on the misery index for Latin America. Panama, with roughly one tenth the misery index score of Venezuela, has used the USD as legal tender since 1904. Ecuador and El Salvador are also both dollarized (Ecuador since 2000 and El Salvador since 2001) – they use the greenback, and it is clear that the embrace of the USD trumps all other economic policies.

The lesson to be learned is clear: the tactics which socialist governments like Venezuela and Argentina employ yield miserable results, whereas dollarization is associated with less misery.

China Makes the Right Move

Yesterday, China’s Central Bank reduced bank reserve requirements for large banks by 50 basis points to 19.5%. The Chinese know that the nominal level of national income is determined by the magnitude of the money supply. They also know that banks produce the lion’s share of China’s money. Indeed, banks produce 77% of China’s M2 money.

As shown in the accompanying chart, the average annual growth rate of China’s money supply since January 2004 has been 17.45%. At present, the annual growth rate for the money supply has slumped to 11%. China’s reduction in the banks’ reserve requirements is designed to push money growth back up towards the trend rate so that an economic slump is avoided. China has made the right move.