tag:blogger.com,1999:blog-8732662769765511163.post9195470973219999827..comments2023-07-31T11:06:29.485+02:00Comments on Transition: Eastern Europe: from Slowdown to NosediveD. Mario Nutihttp://www.blogger.com/profile/17319653816487296802noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-8732662769765511163.post-51808155869262831542009-05-18T16:36:00.000+02:002009-05-18T16:36:00.000+02:00Professor Kaz Poznanski, of the Henry M. Jackson S...Professor Kaz Poznanski, of the Henry M. Jackson School of International Studies, University of Washington, Seattle, WA, writes: <br />"This was very helpful. How would transition economies finance their stimulus programs if tried? Can they sell bonds or go to open market? It appears that transition economies go for major wage cuts. This would be like devaluation. How much this would help?"<br /><br />Good question. <br /> <br />Transition economies are much less indebted - both domestically and internationally, privately and publicly, than other European economies. They have more "fiscal space" (in IMF jargon) and they could and should use it. It might mean printing money (=government selling bonds to the Central Bank thus raising the monetary base). Central bank independence does not seem to stop Ben Bernanke or Trichet, why should it stop the President of the National Bank of Poland - if the government wanted a fiscal stimulus. The trouble is that Jacek Rostowski, the Polish Minister of Finance, is an ultra-conservative who does not want to do it - for the time being. <br /> <br />Wage cuts and devaluations work in an open economy if demand and supply elasticities are right, but do not work if they are competitively adopted by all countries. Unemployment as a world problem - as Keynes taught us - is unlikely to be solved by worldwide wage cuts.D. Mario Nutihttps://www.blogger.com/profile/17319653816487296802noreply@blogger.comtag:blogger.com,1999:blog-8732662769765511163.post-34278560502058803852009-05-15T20:17:00.000+02:002009-05-15T20:17:00.000+02:00I had an exchange of e-mails about this post with ...I had an exchange of e-mails about this post with Professor Phil Hanson, of Chatham House Russia and Eurasia Programme, The Royal Institute of International Affairs, London. I am authorised to report on that exchange.<br /><br /><br />From Phil Hanson: “That's very thoughtful and useful. One trivial point, for the moment: in Russia the Reserve Fund and Fund of National Prosperity (descendants of the stabfond [Stabilisation Fund]) count as part of the forex reserves, so a fall in the Reserve Fund is not additional to a fall in total reserves (though Russian media reporting never seems to reflect this). [DMN: I have corrected this in the post]<br /><br />I've been trying to understand a related question: why are the 2009 forecasts for Russia, including those of the Russian government, so dire when Russian public finances and balance of payments are so strong, even private-sector external debt is modest and the banking system, though entering a shake-out, is not in such bad shape according to recent stress-tests? It strikes me as odd, for example, that Saudi Arabia can take a much bigger fiscal hit (as % GDP) from the oil-price fall than Russia and yet be expected to show only a slight decline in GDP. <br /><br />The most I've been able to come up with, after comparisons with other oil exporters and other BRICs [Brazil, Russia, India, China](but not with other ex-communist countries) is that there seems to be exceptionally fragile confidence in Russian institutions. This is exemplified by the Russian corporate sector's concurrent gross capital flight plus external borrowing, and the (conjectured) propensity of both Russian and foreign investors to treat changes in the oil price as THE key signal of the health of the Russian economy”. <br /><br /> D. Mario Nuti: “You pose some very good questions. A list of possible reasons for the relative Russian/Saudi performance could include on the Russian side: <br /><br />- an overvalued rouble exchange rate, supported by foreign reserves losses too large to be sustainable; <br /><br /> - not "a weak domestic capital market", probably a blessing in disguise at this particular point,<br /><br /> - "borrowing abroad and parking own funds offshore" very likely.<br /><br /> - 33bn assets outflows from Russia in the last quarter of 2008 (see Piroshka Nagy and Stephan Knobloch, BIS data on cross-border flows - a closer look on the brand new EBRD Blog http://www.ebrdblog.com/<br /> <br />- I don't know about pensions. A few years ago I looked at their reform projects in considerable detail (on a project with Mikhail Egonovich Dmitriev, First Deputy Minister for Labour and Social Affairs) - that's when their Pay As You Go system was characterised as "First You Pay And Then You Go". <br /><br /><br />Phil Hanson: My conjecture about especially fragile confidence in Russian institutions is offered as a reason why we saw outflows like those reported by Nagy/BIS [Bank of International Settlements] of $33bn. But why should confidence be so especially weak with respect to Russia? The current global picture seems to me to be full of phenomena that look anomalous. If you take the Economist's record of stock-market indexes around the world from 1/1/08 through 31/12/08, China shows the biggest fall, closely followed by Russia (both $-denominated). In most other respects the China and Russia stories are very different. And Saudi takes a bigger fiscal hit than Russia and has much less transparent public finances and oil and gas are a larger share of GDP, but isn't expected to take anything like the expected GDP knock that Russia is believed to face. I wonder whether the consultant-optimists (notably Evgenii Gavrilenkov at Troika Dialog and Christopher Granville at Trusted Sources) might be right about Russia in 2009 (small increase year on year) and everyone else (IMF, WB, OECD, EC, EBRD -- am I leaving anyone out?) might be wrong.<br /><br /> Russian state pensions: the effort to open up the state pension system to participation by privately-managed pension funds seems to have achieved very little and commitments to raise many state pensions in 2010 add to the burden on the budget. <br /><br /><br />D. Mario Nuti: If one scraped the bottom of the barrel of all possible reasons, I suppose there is a perceived change in Russian policy towards what you call statism, perceived change rather than actual level being the relevant factor.<br /> <br />China does not have a foreign exchange market, just try to buy or sell renmimbi on a large scale, the Central Bank of China decides the exchange rate, period. <br /><br />Have you checked for competitiveness, looking at wage trends relatively to productivity? <br /><br />Is there much foreign capital in Saudi Arabia, both as stock and flows (this is not a rhetorical question, I just don't know but if I had to bet I would think there is more in Russia). <br /><br />Maybe the optimists are right, as you suggest. But optimists about Europe are being shown wrong (Germany -3.8% not year on year but in the first quarter 2009 alone, see www.eurointellingence.com of 15 May). And Latvia has just reported -18% in the first quarter of 2009, year on year. <br /><br />Russian pensions: probably another case of blessing in disguise, or the advantage of under-development and under-reforming.<br /><br /><br />Phil Hanson: The additional questions you raise, Mario, are v. helpful. Will pursue. Please by all means put my points -- attributed is fine -- on to the blog.D. Mario Nutihttps://www.blogger.com/profile/17319653816487296802noreply@blogger.com