Cyclopedia Of Economics 3rd edition

The Slovaks, perhaps a trifle prematurely, rejoiced. The Czech CTK News Agency reported from Prague that the ethnic Hungarian parties in Slovakia were cautiously unhappy. Bela Bugar, the chairman of one such party (the SMK, now in coalition) grumbled, referring to the Hungarian-Slovak basic treaty:

"If this policy of two faces were to continue, it would worsen relations at least on the level of government and the given (Hungarian) ethnic minority." The Hungarian minority in Slovakia was not even consulted before the weighty document was signed by the Socialists (MSZP) and the Union of Free Democrats (SZDSZ).

These very two parties now won the first round of the elections in Hungary, narrowly defeating the center-right coalition led by Fidesz (the Hungarian Civic Party) and the Hungarian Democratic Forum. Of the 185 seats decided, the Hungarian Socialist Party and the Free Democrats ended with 98. Another 176 seats are left to a second round. The parties then cast proportional votes to determine the composition of the remaining 25.

If they win the runoff on April 21 as well - and fervent coalition-making is currently under way - the Socialists will lead this prosperous country of 10 million people into the EU. This would not be their first taste of power, though. They ruled Hungary between 1994 and 1998.

Many Free Democrats found the experience of allying with the Socialists traumatic and believe that it tarnished the party's reputation irreversibly. Some are even pushing to team up with Fidesz rather than with the victorious Socialists. But this is unlikely. The party campaigned on an anti-Fidesz ticket.

A two-party system has emerged from these elections, in which a record 71 percent of eligible voters participated - a sign of the maturation of the Hungarian political scene. Rabid right-wingers, like the Hungarian Justice and Life party (MIEP), were trounced. This removed an obstacle from Hungary's accession to the EU. Their leader, Istvan Csurka, ordered his acolytes to vote for Orban (Fidesz), hoping to recreate the reversal of fortunes in the 1998 elections. The Socialists then also won the first round, only to lose the elections in the second.

The ruling coalition may have been punished by urbanite voters - mainly in Budapest - said the center-left daily "Nepszava". Its open contempt of intellectuals, liberals, the media, and city-dwellers has often translated into withheld or truncated budgets and bureaucratic obstructionism. Zoltan Pokorni, Fidesz's president, said the rural vote would be crucial in the second round:

"We advise our supporters in the provinces to take part in the second round. Their will should not be thwarted by Budapest."

Such was the disenchantment with Orban that the stock exchange surged almost 4% on the news. The Socialists promised less interference in the economy. And during their previous term in office, Hungary's stock market enjoyed an uninterrupted bull run. The forint - propped up by Hungary's preference for a strong currency under Fidesz - dutifully weakened.

Hungary's remarkable economic performance during Orban's reign, state interventionism notwithstanding, seems to have been utterly forgotten, though. The somewhat incredulous Socialist prime ministerial candidate, Peter Medgyessy, said, in his typical low-key manner:

"We are very happy with the confidence that has been expressed by investors. We can guarantee predictability for the economy."

But voters were after justice as well as predictability. Inequality in capitalistic Hungary grew under Orban. In post-communist societies, evenly spread poverty is often preferred to unevenly spread riches. Gnawing envy may have led to electoral retribution. Orban was accused of authoritarianism, cronyism, and patronage.

Fidesz has been denigrated as merely enjoying the long-delayed fruits of painful reforms the Socialists have instituted - for which the latter paid dearly in the last elections in 1998. The chairman of the Free Democrats, Gabor Kuncze, already cautioned against "stealth privatization" of various state assets, including many farms and a retail chain. The government, he warned, should act as a mere caretaker.

Orban's escalating rhetoric worked against him. It began to unsettle foreign investors and EU commissioners alike. But, above all, it did not resonate with the increasingly sophisticated and cosmopolitan society that Hungary has become. Orban typecast himself as a rustic, traditionalist, anti-intellectual, nationalistic, and down to earth populist folk hero. Hungary is urban, non-conservative, intellectual, and European. It feared a possible Fidesz-MIEP rule.

Peter Medgyessy could not have been more different. He joined the Socialist party only lately and reluctantly. He worked as a besuited banker in Societe Generale in Paris. He is a technocrat. The Financial Times described his performance in a debate with the brash and arrogant Orban - "Calm and factual".

Agrarian voters may yet turn the tide. If enough Socialist voters stay home on April 21, now that MIEP is no more - Fidesz could still pull a last minute rabbit out of the hostile ballot box. But whoever wins, the right will never be the same again. It has been humbled - and warned. Be part of a liberal Europe - or cease to be altogether.

The Budapest Stock Exchange has reached its zenith for the year earlier this month, having risen by a quarter since January 1. It was buoyed by flows of foreign capital. Foreign investors disliked the outgoing government for its heavy handed interventionism and micro-management of the economy. It was also tainted by nepotism and cronyism, though not by outright and crass corruption.

Having apparently learned nothing from his biting defeat in the first round of the elections on April 7, the youthful and unrepentant prime minister, Orban, fanned the xenophobia that has become his hallmark. He cited the stock exchange's vicissitudes as proof positive of the undue and pernicious influence of "big (read: foreign) capital", likely to be running the country under the socialists.

In some ways, these elections seem to perpetuate a pattern. No government in central Europe has leveraged its first term to win a second one. Yet, in other ways, these elections are a watershed. What is decided is not the fate of politician or a party. At stake is the process of EU enlargement and the future image of a united Europe.

In a massive rally on Saturday at Kossuth ter in front of the well-lit building of parliament, Orban, flanked by pop stars and celebrity athletes, addressed the crowd, claiming to believe in the forces of "unity and love". He implored his listeners to join the train to the future. He contrasted the Bokros austerity plan of his socialist predecessors with his own business-friendly Szechenyi program. He called upon voters to "bring a friend with them to vote (for the party he chairs, Fidesz)".

Orban stands for a prouder, more affluent, Hungary. No longer the mendicant at the gates of the kingdom of Brussels, he promotes the interests of his country fearlessly and does not recoil from tough bargaining and even conflict. While unwaveringly committed to the European project, Orban, like Vaclav Klaus in the Czech Republic, is an unmistakable nationalist.

His nationalism often comes uncomfortably close to a vision of "Great Hungary". It is a non-territorial kind of expansionism and it encompasses all the Hungarians wronged by the treaty of Trianon and doomed to become minorities in neighboring countries.

By showering these expatriates with financial benefits and extra-territorial rights, Orban has engaged in economic imperialism on a minor scale. The socialists want to renegotiate the agreement with Romania, granting special privileges to Romanian temporary workers in Hungary. This was the political price Orban had to pay in order to extend these rights and more to Hungarians in Romania.

Fidesz has an informal and uneasy alliance with MIEP, the far-right, ultra-nationalist, and intermittently anti-Semitic, Hungarian Justice and Life Party. Its supporters attended the Saturday rally. Its leaders called on Fidesz to out and accept MIEP's help publicly.

Quoted in Hungarian Radio, deputy parliamentary group leader, Csaba Lentner, said that "it could have tragic consequences if the 250,000 MIEP voters will not even receive a good word from the centre-right for their unselfish sacrifice (in voting for Fidesz in the second round, as their leadership recommended)".

The nation-state may have been grafted on eastern Europe in the 20th century - but in central Europe it has always been a natural outgrowth. Yet, in both regions it derives its vitality from the land. Nationalism in the east has agrarian, rustic roots. Orban inevitably gravitated towards the village - the symbol of tradition, wholesomeness, integrity, forthrightness, honesty, deep-rooted commitment to the nation, the abode of the nuclear family - home and hearth. No wonder that the main bones of contention in the negotiations towards EU accession are farm subsidies and agricultural policy.

This mythical vision was contrasted with the no less mythical vision of the city - Budapest. Cosmopolitan, traitorous, non-productive, swarming with criminals, con-men, foreigners, and uprooted intellectuals. Orban starved Budapest by denying it access to budget funds. He clashed with its mayor publicly and gleefully. He berated urbanites and extolled the farmers. He was duly punished in the ballot box by disgruntled city-dwellers.

Europe's hinterland - the vast arable lands of Poland, Germany, Hungary, Ukraine, and Russia - is being denuded by the forces of the market. The cities swell inexorably. Urban development has become unsustainable. Infrastructure is crumbling. Crime is soaring. Orban represents the forces of reaction to these disturbing trends.

Orban may be paying the price for the success of the Hungarian economy. Capitalism is driven by inequality - and ruined by iniquity. Capitalist societies encourage people to swap their rags for riches. Capitalism seeks to foster constructive envy and the wish to emulate success stories. But a society divided among haves and haves not is, by definition, unequal and polarized. In post-communist societies, evenly spread destitution is often preferred to unevenly spread affluence. Gnawing envy may have led to electoral retribution.

Orban was also accused of authoritarianism, cronyism, and patronage. These have nothing to do with capitalism and a lot to do with nanny-state communism. Old habits die hard. State interference, the formation of a nomenclature, cronyism in privatization deals, lack of transparency, paranoia - are all leftovers from four decades of communist depredation.

In an ominous note, Peter Medgyessy, the socialist's technocratic prime ministerial candidate, vowed to honor agreements signed by the current government - if they are found to be legal. Orban, being the brash representative of a new generation, was supposed not to have been contaminated by a depraved past. But he proved to be even more socialist than any socialist before him. The markets rejoiced at the reasonable prospect of his political demise.

Where is the EU headed? Will it become a confederation of independent nation-states, as Britain would have it? Or will a Unites States of Europe emerge and subsume its components, the erstwhile nation-states?

This may well be decided in central Europe rather than in its west. Countries like France and Britain are already committed to one model or another. The swing votes - today's applicants, tomorrow's members - will, in all likelihood, determine the outcome of this debate. Hungary realizes that the greater the number of candidates it sponsors, the more clout it will possess in any future arrangement. Hence, its continued demands to commence preliminary discussions with Ukraine, Belarus, and Moldova - the EU's future neighbors following enlargement - with a view to their ultimate accession.

It was a Frenchman (Ernest Renan) who wrote:

"Nations are not eternal. They had a beginning and they will have an end. And they will probably be replaced by a European confederation."

Russian mobsters love Budapest and not only for its views and cosmopolitan atmosphere. They can easily obtain a Hungarian passport posing as "investors" by laundering the proceeds of their illicit activities. The CIA labels Hungary a "major transshipment point for Southwest Asian heroin and cannabis and transit point for South American cocaine destined for Western Europe". It is also a "limited producer of precursor chemicals, particularly for amphetamine and methamphetamine". This is why Hungary made it into the visa regimes of many a Western country in the last few months.

The opposition Hungarian Socialist Party (MSZ) harps on Hungary's tarnished image. It accuses the government of opaqueness in tax collection and budget spending. The current legal codes threaten the rule of law, they thunder.

Two years ago, Hungary was considered less suitable to join the EU than the likes of the Czech Republic, Malta, and Slovenia. Today, its youthful and nationalistic prime minister, Viktor Orban, feels comfortable to state on Hungarian Radio: "It is not us who will join the EU - but the EU will come to us."

The abolition of borders within the EU will make Hungary a "nation of 15 million", he boasts, referring to Hungarian minorities in neighboring countries (mainly in Romania and Slovakia). Hungary is the top performer of the LEGSI index which monitors the stability of countries.

Many consider 38-year old Orban to be his country's main liability. His fiery speeches, provocative statements, and controversial policies often pit Hungary against other European countries, near and far. But this is hypocrisy. Orban's policies are typical of the countries of Central and Eastern Europe and many have emulated them.

Even his "Status Law" which grants employment, education, and social welfare benefits to minority Hungarians elsewhere - has equivalents in Germany, Russia, and Slovakia, among others. It is little known that Romanians enjoy much the same economic benefits in Hungary as their Hungarian compatriots.

As opposed to other countries in transition, Hungary did not have a single bad year since 1994. Orban's reign (from 1998) has been characterized by rapid growth (5 percent p.a.), low inflation (7 percent), and even lower unemployment (6 percent nationwide and less than 3 percent in the Budapest area). The minimum wage has doubled and real wages are up 17 percent, in line with sustained increases in labour productivity.

Taxes were cut and much deeper cuts are planned after the April 2002 elections. Employer participation in social security contributions was reduced from 33 percent to 29 percent in January.

Net external debt is half its level seven years ago - though gross external debt, at 60 percent of GDP, is high. External debt growth is currently driven by the private sector (mainly by multinationals).

This was achieved by a strange mixture of forceful government interference and the introduction of competition almost everywhere. Orban's government seems to have accomplished the impossible: micromanaging a free market economy.

Despite the presence of most multinationals, Hungary is surprisingly xenophobic. Cumulative FDI - though often offset by outflows of portfolio capital - stands at $26 billion ($2.8 billion last year alone), most of it from Germany and the Netherlands. It will likely grow considerably as accession beckons. But foreigners still find it fiendishly difficult to buy land, trade protectionism in growing, and ministers regularly denounce foreign domination and multinational encroachment upon the local economy.

Vaclav Klaus, the Czech Republic's outspoken elder statesman, warned against an emerging "Munich-Vienna-Budapest" axis of evil directed against other Central and Eastern European nations. Jewish leaders accuse Fidesz, the ruling party, of latent anti-Semitism.

In reports published by Lehman Brothers and Dresdner, Kleinwort, Wasserstein, foreign investors felt that EU accession will be retarded and new FDI discouraged should a minority government team up with the ultra rightwing Justice and Life Party (MIEP). Another concern was the loss of control over budget spending.

Hungary reneged on agreements it signed during the heyday of privatization (1993-7), when it raised more than $6 billion by selling stakes in its banking, media, and telecom sectors. The American power utility, AES, sued both the government and the Hungarian power grid for breach of contract for refusing to purchase generated power (admittedly at inflated prices). It grudgingly settled out of court last December.

The government of Canada protests the nationalization without compensation of a Canadian business running Budapest's airport terminals. The Canadians, according to "The Financial Times" accuse Hungary of appearing to "violate the obligations" of the Canadian-Hungarian investment protection agreement.

There are other worrying reversals- neatly embodied by the Szechenyi Plan for national economic development.

Hungary's budget deficit in the first two months of the year - at half a billion dollars - is four times the deficit in the corresponding period last year. Revenues are expected to deteriorate further as customs and duties are lowered - for instance on American cars.

Agricultural producer prices collapsed by one eighth in January alone, forcing the government to dole out supplementary subsidies. The western and eastern parts of Hungary - heavily dependent as they are on agriculture and basic manufacturing - do not share in the prosperity enjoyed by Budapest.

The government also decided to raise gas prices by less than inflation - all part of a new regulatory regime, replete with hidden, pre-election, subsidies. It has cancelled plans to privatize Postabank, opting instead to merge it with other state entities. It has re-nationalized a few motorways and all future motorways will be financed by the state-owned Hungarian Development Bank.

Hungary is also a greying country - 15 percent of its population are older than 65. Its workforce is contracting as its net population growth rate has turned negative. It part privatized its pensions but its un-revamped health care system masks enormous contingent obligations. Corruption is rife and the informal economy large.

Still, Hungary is flourishing.

Though its annual budget deficit and trade deficit - at $2 billion each - are c. 4 percent of GDP, its sovereign debt is the second highest rated among all the economies in transition. Government consumption is a mere 10% of GDP. Hungary is an open economy - trade constitutes two thirds of GDP.

Services make up more than 60 percent of Hungary's GDP - compared to half as much in industry. But Hungary is fast becoming an important components manufacturing and assembly zone for richer EU countries. Its industrial sector is likely to grow. Its energy monopoly, MOL, is consolidating with other oil companies in Central Europe. Its current account deficit is a mere 2 percent of a vigorous and expanding economy. More than three quarters of its exports are to EU destinations.

Interestingly, almost 40 percent of Hungary's population live in rural areas - though agriculture accounts for only 5 percent of GDP and 6 percent of the workforce. Only 16 years ago, more than a fifth of Hungary's population worked in agriculture.

Hungary's financial system is advanced and sophisticated. Interest rates are on a prolonged downward trend. The National Bank of Hungary has cut interest rates 7 times since September last year. Both gross national savings and gross domestic investment equal more than 25 percent of GDP. Less than 9 percent of the population are under the official poverty line.

Hungary has become a major supplier of car parts to the British motor industry. It is linking up to the hinterland of Eastern Europe and the Balkan by rail and road. The private sector accounts for 80 percent of GDP.

The Danube - Hungary's primary sea access - has been re-opened for traffic four months ago, for the first time since the Kosovo war. This saves Hungary tens of thousand of dollars in excess shipping costs - daily. Moreover, a Romanian-led consortium is promoting the idea of opening an alternative oil shipping lane cum pipeline through Hungary to ease the pressure on the Turkish straits.

Stratfor, the US-based strategic forecasting firm, has this to say about the re-opening of this vital transport route:

"The river's reopening will have several important effects ... It will promote trade and integration among European Union members and applicants alike ... To keep shipping costs under control, the European Union will facilitate the construction of alternate shipping infrastructure bypassing those straits.

All of these circumstances necessitate closer cooperation, both economic and political, among the EU states fast-tracked for membership and other powers in the region. Ultimately, that could help smooth the EU expansion process and aid the economies of several riparian states...

The Danube reopening comes at a fortuitous time. The European Union is accelerating expansion efforts, and all of the riparian states are either EU members or potential members. Although the EU does fund numerous infrastructure projects to promote trade, the Danube provides an instant avenue for economic integration. The EU's decision last year to shoulder most of the cost of clearing the river served as a nice political push for closer relations with applicant nations as well."

Orban's assertive comments notwithstanding, Hungary's economic future is pivotally dependent on a smooth accession to the EU, probably in 2004-5. Despite its polished, Western, image, it must invest heavily to comply with EU environmental standards and to overhaul its tax administration and legal system. Such budgetary outlays - especially in an election year - will strain Hungary's compromised fiscal discipline even further. Hungary (and the IMF) are discovering that EU accession may be incompatible with macro-economic stability.

Still, Hungary is a regular favorite of multilateral institutions.

Though often accompanied by monetary loosening due to massive capital inflows, Hungary's 15 percent band exchange rate regime (its crawling peg was abandoned in October) and inflation targeting are often lauded by the OECD.

The World Bank has committed to Hungary $2 billion in projects since 1991 - mostly for structural and institutional reforms and macro-economic support. Hungary is a recipient of Japan's Exim bank's co-financing facilities. As Hungary's transformation progressed, lending by these institutions dried up lately and Hungary owes the World Bank a meager $550 million.

By June 2001, the EBRD has invested $1.2 billion in Hungary in 64 projects worth $4.9 billion - most of them in the private sector, in telecommunication, transportation, and banking.

Hungary's elections may result in a hung parliament. If so, fiscal rectitude will be the chief victim. Hungary's monetary policy is strained to its limits. Labour shortages are likely, especially in the cities. Expect more populism, nationalistic fervor, and glitches on the path to the EU.

But Hungary was among the first communist countries to introduce a free market system in the 1960's. It became a member of the World Bank in 1982. It withdrew from the Warsaw Pact in 1956. It has always been a pioneer. "The Hungarian model" - state interventionism coupled with a thriving private sector - is working. No amount of political tinkering can bring it down.

Ver.di, the service sector's behemoth, with 3 million members, waited for IG Metall's regional wage boards to pronounce their sentence before plunging into its own negotiations with employers. Miraculously, it - and many other unions - ended up demanding the very same pay rise as did the metal-bashers. IG Metall's standing reflects the historical reverence accorded in Germany to the engineering and scientific professions.

IG Metall justified the outlandish wage increases it insists on (4-5 percent) - and the impending strike in Baden-Württemberg by 50,000 (out of 3.6 million) metalworkers on May 6 - by saying that the raises will boost domestic consumption and revive the flagging economy. Some of the extra money will be used to modernize the pay framework agreements and equate the status and the remuneration of blue collar and white collar workers doing "similar" jobs.

Warning strikes have already erupted over the last few weeks. The main employers' federation, Gesamtmetall, threatened the striking employees with lockouts.

The strike may yet be averted. Employers are offering an across the board hike of 3.3 percent over the next 15 months and a one time cash handout of $170 per worker. This is imperceptibly lower than IG Metall's target of 4 percent. IG Metall is likely to buckle down and agree to arbitration or mediation, perhaps by the embattled Schroeder, though he is reluctant to gamble his political future on the outcome as he has done two years ago. A compromise of 3.6 percent is likely, though. As IG Metall knows, many an invincible union perished through bungled strikes.

Moreover, IG Metall's previous strike was in 1995 and it cannot afford to alienate a socialist Chancellor who is in the throes of a re-election campaign. Still, it is implausibly threatening to spread the unrest from its stronghold, the southern state of Baden-Württemberg, to Berlin and Brandenburg. Ominous mutterings of a repeat of the mythical six weeks strike in the spring of 1984 abound.

This reads like a repeat of the wage negotiations in 2000. Then, as now, IG Metall demanded an increase of 5.5 percent as well as a reduction in retirement age to 60 and in the working week to 32 hours. Warning strikes petered out and the union capitulated by accepting a two year contract with modest pay rises (3 percent in 2000 and 2.1 percent in 2001).

The two previous annual wage settlements trailed inflation, expected to reach 2 percent this year. They reflected only a part of the handsome productivity gains throughout German industry. Net profits in IG Metall's sectors climbed from 1 billion DM in 1993 (a recession year) to 55 billion DM in 2000.

Real unit labour costs tumbled - but mainly due to massive layoffs. More than 1.5 million workers out of a total of 5 million in 1991 were sacked. IG Metall wants its members to recoup some of their past generosity. In a typical German euphemism, this grab is called a "redistribution component".

Admittedly, German employers abused the union's relative wage restraint during the 1990's. They did not create additional employment, nor did they invest in the retraining and re-qualification of workers made redundant. The union justly claims that wage moderation only fostered the transfer of wealth from labour to capital (i.e., from employees to shareholders).

Whatever the outcome of this industrial action, the employers will foot the bill. "Frankfurter Allgemeine" estimates that every day of the strike would translate to a whopping $2.3 billion in lost net output. Each 0.1 percent in wage increases costs the metal and electric industries c. $140 million a year. This in an industry mired in declining orders and falling production.

IG Metall's Web site is a militant affair. "Right to Strike - Away with the anti-strike paragraphs!" -it thunders. "Strike is a civil right - lockout is a misuse of power" - it preaches. It even provides practical "how-to-strike" guides, tips for strikers, and promotes a new model of "flexi-strike".

IG Metal is strict about the universal implementation of the collective agreements it painstakingly negotiates with employers. Such agreements typically tackle not only wage levels but issues like training, reduction in working time, safeguarding jobs, and equating eastern pay with western standards. The comprehensiveness and all-pervasiveness of the collective bargains is Procrustean.

"The Economist" reports the case of Viessmann, a German engineering firm. To avoid shifting the production of a new boiler to the Czech Republic, it negotiated with its workers an increase in the working week without a commensurate pay rise. IG Metall blocked the deal, though it later compromised.

This is a typical story. The collective agreements in 2000 and 2001 were an aberration and a political concession to a socialist regime in trouble. In contrast, wages rose 4.1 percent in workplaces covered by the 1999 settlement with IG Metall - most of them multinationals who exploited the agreement's egregious terms to squeeze their indigenous Mittelstand suppliers.

IG Metall is notoriously intransigent. Unlike its brethren in other industries, it refuses to link pay rises (or even annual bonuses) to profitability, for instance. It rejects the idea of implementing, by mutual consent of employees and employers, wage reductions or overtime to prevent lay-offs. It abhors profit sharing schemes, either regional, or sectoral, or even confined to the single plant level.

It would not sign two-year pay agreements based on "bad experience" in the past. Many exasperated firms resort to the profligate exercise of "opening (escape) clauses". They renege on the collective agreements without being seen to flout the rules.

Employers ask employees to continue the working day at home after hours. Some workers clock out but continue to work all the same. Other firms - especially in the east - opt out of the employers' associations altogether, thus exempting themselves from onerous collective pay agreements.

Many attribute IG Metall's irrational exuberance to its rational fears of becoming marginalized and irrelevant. Wage increases - the union's only political leverage - are hard to negotiate in an environment of stable and low inflation, high unemployment, and ever more flexible labour markets.

The unions hitherto refrained from tackling the most pressing issues: flexible time, part time work, retirement, low wage jobs, social security reform, illegal immigrants. IG Metall spent the last 15 years negotiating an agreement to apply uniform wage criteria to blue-collar and white-collar workers.

The "Alliance for Work" pact between unions, employees, and government, proposed by its Chairman, Klaus Zwickel, in its 18th convention in 1995, went nowhere effective, though it was signed by all three parties. It included revolutionary ideas like linking pay to productivity - in return for job creation by the private sector and unemployment subsidies by the state. This was also the fate of a 1997 initiative to reduce working hours in parallel with wages in order to boost job formation.

Paradoxically, the higher the pay of its members - the less strike-prone is the union. Lay-off and strike pay doled out by the union is a function of the striking member's base wage. Add to this current expenditures - IG Metall employs more than 2000 people in its headquarters alone - and the limits of its postured belligerence become discernible.

In a major survey conducted last year in the framework of the unions' "Debate on the Future" initiative, 78 percent of German workers - union members and non-members alike - professed to being more interested in job security than in higher pay. Nine out of 10 respondents expected the unions to support secure jobs and fight unemployment.

Some workers begin to fathom the union's role in destroying employment by foisting a non-competitive wage structure upon reluctant employers. Eighty percent of employees surveyed expected IG Metall to do much more for the unemployed. Regrettably, the vast majority of the membership of IG Metall are still pugnacious and under the sway of populist activists.

Even so, IG Metall is past its heyday. It is the anachronistic outcome of numerous mergers with other fading unions in the plastics, textile, and wood industries. Despite these acquisitions and the influx of East German laborers, its membership hasn't budged since the early 1980's. In the 1990's alone it has declined by more than a million members - almost one third of the total - despite acquiring a million new members from the east.

One third of the members are retired. Less than 7 percent are under the age of 25. Women are deserting the union in droves. IG Metall represents less than 30 percent of actively employed workers in its industrial sectors.

In its "Debate on the Future" survey only 5 percent of all respondents said they would "definitely" join IG Metall. Only 3 percent imagined a long-term membership. Two thirds of the unorganized employees surveyed said they have no interest whatsoever in becoming union members.

The surges in membership that followed previous confrontations with employers seem to have abated. And 1 percent of gross wages in membership dues is a lot to pay for ill-defined and uncertain benefits. The average wage in industry - among the highest in the world - amounts to $37,000 a year, including social security contributions.

To make matters worse, in the last few significant rounds of wage negotiations, IG Metal lost its traditional bellwether role to IG BCE, the more nimble union of workers in the chemical and energy sectors. This much smaller new union signed the first collective agreements each time, thus weakening IG Metall's hand in its own negotiations.

There are cracks in IG Metall's hitherto uniform ideological facade. On March 1998 it signed an agreement with Debis -  a group of car makers and metal bashing firms represented by Daimler-Benz. It agreed to let the employers decide how to flexibly implement a reduced working week of 35 hours. Five thousand companies had individual contracts with unions by the end of 1997.

Last August, bowing to political pressures by the SDP and the public outcry of its own members, IG Metall signed a plant level agreement with Volkswagen. This vitiated its insistence on exclusive industry-wide agreements. Moreover, the VW deal includes flexible work rules and pay. Five thousand workers are each to be paid 5000 DM a month to produce Volkswagen's 5000 model.

The convergence of the manufacturing and services sectors leads to mergers or collaborative efforts among competing unions. Fields like Information Technology (IT), telecommunications, pharmaceutics, and biotechnology blur the lines between knowledge and production.

Last year, for instance, IG Metall created a joint bargaining committee with the new umbrella services union, Ver.di. The committee - the indirect outcome of arbitration involving the two unions - will represent all of IBM's 26,000 workers in its German subsidiaries. Ver.di includes as one of its components one of IG Metall's most bitter rival unions, DAG.

But it would take a determined - and somewhat Thatcherite - government to face the unions down. Many German luminaries advocate a sea change in the laws pertaining to strikes, labour relations, and wage bargaining. Strikes should be allowed only after mediation fails. Employers and employees should negotiate plant-level arrangements. These seismic shifts will not transpire without a bloodied fight. Unions are monopolies and they act as cartels. Their interests are overwhelmingly vested in the status quo.

Yet, such a showdown is long overdue - and victory is within reach. Only one in five working age Germans - less than 8 million - belong to a union. Overall membership deflated by almost two fifths since unification. Even the awesome industry wide agreements cover a mere one fourth of German firms in the east - and a one half of all businesses in the western Lander.

No wonder that IG Metall has in its sights targets in east Germany and in Germany's "sphere of influence". The union owns the Otto Brenner Foundation. It is named after IG Metall's first boss and was established in 1972 "to promote the metalworkers trade union". In 1997, its dismal finances were boosted by the serendipitous liquidation of IG Metall's assets in the former East Germany.

Though claiming to engage in impartial "scientific" research, the Foundation aims to spread the union gospel among the heathen of central and eastern Europe and, especially, the eastern German Lander. The Foundation's Administrative Board is appointed by IG Metall.

Perhaps in an effort to improve its public image, IG Metall issued, in January 1999, a press release in support of compensation for forced laborers in the metal industry. It notes that the 10 million slaves that toiled and perished in German factories during the Nazi occupation of Europe constituted 40 percent of Germany's industrial workforce. More than 1000 concentration camps were "directly near or on" company property.

It took IG Metall - an ostensibly leftist organization - almost 50 years to condemn the crimes of German business and industry during the Nazi era. It is a measure of the glacial tempo of its decision making processes. Nothing seems to shake it from its well rehearsed torpor. It, therefore, is probably doomed to share the fate of other unions - gradual but assured dissipation.

IMF (International Monetary Fund)

“IMF Kill or Cure” was the title of the cover page of the prestigious magazine, "The Economist" in its issue of 10/1/98. The more involved the IMF gets in the world economy - the more controversy surrounds it. Economies in transition, emerging economies, developing countries and, lately, even Asian Tigers all feel the brunt of the IMF recipes. All are not too happy with it, all are loudly complaining. Some economists regard this as a sign of the proper functioning of the International Monetary Fund (IMF) - others spot some justice in some of the complaints.

In his book, "A Farewell to Alms" (Princeton University Press, 2007), Gregory Clark, an economic historian at the University of California, Davis compares the World Bank and the IMF to "cult centers", "prescientific physicians who prescribed bloodletting for ailments they did not understand", as the New-York Times aptly paraphrased him.

The IMF was established in 1944 as part of the Bretton Woods agreement. Originally, it was conceived as the monetary arm of the UN, an agency. It encompassed 29 countries but excluded the losers in World War II, Germany and Japan. The exclusion of the losers in the Cold war from the WTO is reminiscent of what happened then: in both cases, the USA called the shots and dictated the composition of the membership of international organization in accordance with its predilections.

Today, the IMF numbers 182 member-countries and boasts "equity" (own financial means) of 200 billion USD (measured by Special Drawing Rights, SDR, pegged at 1.35 USD each). It employs 2600 workers from 110 countries. It is truly international.

The IMF has a few statutory purposes. They are splashed across its Statute and its official publications. The criticism relates to the implementation - not to the noble goals. It also relates to turf occupied by the IMF without any mandate to do so.

The IMF is supposed to:

1. 
   Promote international monetary cooperation;
   
2. 
   Expand international trade (a role which reverted now to the WTO);
   
3. 
   Establish a multilateral system of payments;
   
4. 
   Assist countries with Balance of Payments (BOP) difficulties under adequate safeguards;
   
5. 
   Lessen the duration and the degree of disequilibrium in the international BOPS of member countries;
   
6. 
   Promote exchange rate stability, the signing of orderly exchange agreements and the avoidance of competitive exchange depreciation.
   

The IMF regularly monitors exchange rate policies, the general economic situation and other economic policies. It does so through the (to some countries, ominous) mechanism of "(with the countries' monetary and fiscal authorities). The famed (and dreaded) World consultation" Economic Outlook (WEO) report amalgamates the individual country results into a coherent picture of multilateral surveillance. Sometimes, countries which have no on-going interaction with the IMF and do not use its assistance do ask it to intervene, at least by way of grading and evaluating their economies. The last decade saw the transformation of the IMF into an unofficial (and, incidentally, non-mandated) country credit rating agency. Its stamp of approval can mean the difference between the availability of credits to a given country - or its absence. At best, a bad review by the IMF imposes financial penalties on the delinquent country in the form of higher interest rates and charges payable on its international borrowings. The Precautionary Agreement is one such rating device. It serves to boost international confidence in an economy. Another contraption is the Monitoring Agreement which sets economic benchmarks (some say, hurdles) under a shadow economic program designed by the IMF. Attaining these benchmarks confers reliability upon the economic policies of the country monitored.

Where surveillance ends, financial assistance begins. It is extended to members with BOP difficulties to support adjustment and reform policies and economic agendas. Through 31/7/97, for instance, the IMF extended 23 billion USD of such help to more than 50 countries and the outstanding credit portfolio stood at 60 billion USD. The surprising thing is that 90% of these amounts were borrowed by relatively well-off countries in the West, contrary to the image of the IMF as a lender of last resort to shabby countries in despair.

Hidden behind a jungle of acronyms, an unprecedented system of international finance evolves relentlessly. They will be reviewed in detail later.

Technical Assistance

The last type of activity of the IMF is Technical Assistance, mainly in the design and implementation of fiscal and monetary policy and in building the institutions to see them through successfully (e.g., Central Banks). The IMF also teaches the uninitiated how to handle and account for transactions that they are doing with the IMF. Another branch of this activity is the collection of statistical data - where the IMF is forced to rely on mostly inadequate and antiquated systems of data collection and analysis. Lately, the IMF stepped up its activities in the training of government and non-government (NGO) officials. This is in line with the new credo of the World Bank: without the right, functioning, less corrupt institutions - no policy will succeed, no matter how right.

From the narrow point of view of its financial mechanisms (as distinct from its policies) - the IMF is an intriguing and hitherto successful example of international collaboration and crisis prevention or amelioration (=crisis management). The principle is deceptively simple: member countries purchase the currencies of other member countries (USA, Germany, the UK, etc.). Alternatively, the draw SDRs and convert them to the aforementioned "hard" currencies. They pay for all this with their own, local and humble currencies. The catch is that they have to buy their own currencies back from the IMF after a prescribed period of time. As with every bank, they also have to pay charges and commissions related to the withdrawal.

A country can draw up to its "Reserve Tranche Position". This is the unused part of its quota (every country has a quota which is based on its participation in the equity of the IMF and on its needs). The quota is supposed to be used only in extreme BOP distress. Credits that the country received from the IMF are not deducted from its quota (because, ostensibly, they will be paid back by it to the IMF). But the IMF holds the local currency of the country (given to it in exchange for hard currency or SDRs). These holdings are deducted from the quota because they are not credit to be repaid but the result of an exchange transaction.

A country can draw no more than 25% of its quota in the first tranche of a loan that it receives from the IMF. The first tranche is available to any country which demonstrates efforts to overcome its BOP problems. The language of this requirement is so vague that it renders virtually all the members eligible to receive the first instalment.

Other tranches are more difficult to obtain (as Russia and Zimbabwe can testify): the country must show successful compliance with agreed economic plans and meet performance criteria regarding its budget deficit and monetary gauges (for instance credit ceilings in the economy as a whole). The tranches that follow the first one are also phased. All this (welcome and indispensable) disciplining is waived in case of Emergency Assistance - BOP needs which arise due to natural disasters or as the result of an armed conflict. In such cases, the country can immediately draw up to 25% of its quota subject only to "cooperation" with the IMF - but not subject to meeting performance criteria. The IMF also does not shy away from helping countries meet their debt service obligations. Countries can draw money to retire and reduce burdening old debts or merely to service it.

It is not easy to find a path in the jungle of acronyms which sprouted in the wake of the formation of the IMF. It imposes tough guidelines on those unfortunate enough to require its help: a drastic reduction in inflation, cutting back imports and enhancing exports. The IMF is funded by the rich industrialized countries: the USA alone contributes close to 18% to its resources annually. Following the 1994-5 crisis in Mexico (in which the IMF a crucial healing role) - the USA led a round of increases in the contributions of the well-to-do members (G7) to its coffers. This became known as the Halifax-I round. Halifax-II looks all but inevitable, following the costly turmoil in Southeast Asia. The latter dilapidated the IMF's resources more than all the previous crises combined.

At first, the Stand By Arrangement (SBA) was set up. It still operates as a short term BOP assistance financing facility designed to offset temporary or cyclical BOP deficits. It is typically available for periods of between 12 to 18 months and released gradually, on a quarterly basis to the recipient member. Its availability depends heavily on the fulfilment of performance conditions and on periodic program reviews. The country must pay back (=repurchase its own currency and pay for it with hard currencies) in 3.25 to 5 years after each original purchase.

This was followed by the General Agreement to Borrow (GAB) - a framework reference for all future facilities and by the CFF (Compensatory Financing Facility). The latter was augmented by loans available to countries to defray the rising costs of basic edibles and foodstuffs (cereals). The two merged to become CCFF (Compensatory and Contingency Financing Facility) - intended to compensate members with shortfalls in export earnings attributable to circumstances beyond their control and to help them to maintain adjustment programs in the face of external shocks. It also helps them to meet the rising costs of cereal imports and other external contingencies (some of them arising from previous IMF lending!). This credit is also available for a period of 3.25 to 5 years.

1971 was an important year in the history of the world's financial markets. The Bretton Woods Agreements were cancelled but instead of pulling the carpet under the proverbial legs of the IMF - it served to strengthen its position. Under the Smithsonian Agreement, it was put in charge of maintaining the central exchange rates (though inside much wider bands). A committee of 20 members was set up to agree on a new world monetary system (known by its unfortunate acronym, CRIMS). Its recommendations led to the creation of the EFF (extended Financing Facility) which provided, for the first time, MEDIUM term assistance to members with BOP difficulties which resulted from structural or macro-economic (rather than conjectural) economic changes. It served to support medium term (3 years) programs. In other respects, it is a replica of the SBA, except that that the repayment (=the repurchase, in IMF jargon) is in 4.5-10 years.

The 70s witnessed a proliferation of multilateral assistance programs. The IMF set up the SA (Subsidy Account) which assisted members to overcome the two destructive oil price shocks. An oil facility was formed to ameliorate the reverberating economic shock waves. A Trust Fund (TF) extended BOP assistance to developing member countries, utilizing the profits from gold sales. To top all these, an SFF (Supplementary Financing Facility) was established.

During the 1980s, the IMF had a growing role in various adjustment processes and in the financing of payments imbalances. It began to use a basket of 5 major currencies. It began to borrow funds for its purposes - the contributions did not meet its expanding roles.

It got involved in the Latin American Debt Crisis - namely, in problems of debt servicing. It is to this period that we can trace the emergence of the New IMF: invigorated, powerful, omnipresent, omniscient, mildly threatening - the monetary police of the global economic scene.

The SAF (Structural Adjustment Facility) was created. Its role was to provide BOP assistance on concessional terms to low income, developing countries (Macedonia benefited from its successor, ESAF). Five years later, following the now unjustly infamous Louvre Accord which dealt with the stabilization of exchange rates), it was extended to become ESAF (Extended Structural Adjustment Facility). The idea was to support low income members which undertake a strong 3-year macroeconomic and structural program intended to improve their BOP and to foster growth - providing that they are enduring protracted BOP problems. ESAF loans finance 3 year programs with a subsidized symbolic interest rate of 0.5% per annum. The country has 5 years grace and the loan matures in 10 years. The economic assessment of the country is assessed quarterly and biannually. Macedonia is only one of 79 countries eligible to receive ESAF funds.

In 1989, the IMF started linking support for debt reduction strategies of member countries to sustained medium term adjustment programs with strong elements of structural reforms and with access to IMF resources for the express purposes of retiring old debts, reducing outstanding borrowing from foreign sources or otherwise servicing debt without resorting to rescheduling it. To these ends, the IMF created the STF (Systemic Transformation Facility - also used by Macedonia). It was a temporary outfit which expired in April 1995. It provided financial assistance to countries which faced BOP difficulties which arose from a transformation (transition) from planned economies to market ones. Only countries with what were judged by the IMF to have been severe disruptions in trade and payments arrangements benefited from it. It had to be repaid in 4.5-10 years.

In 1994, the Madrid Declaration set different goals for different varieties of economies. Industrial economies were supposed to emphasize sustained growth, reduction in unemployment and the prevention of a resurgence of by now subdued inflation. Developing countries were allocated the role of extending their growth. Countries in transition had to engage in bold stabilization and reform to win the Fund's approval. A new category was created, in the best of acronym tradition: HIPCs (Heavily Indebted Poor Countries). In 1997 New Arrangements to Borrow (NAB) were set in motion. They became the first and principal recourse in case that IMF supplementary resources were needed. No one imagined how quickly these would be exhausted and how far sighted these arrangement have proven to be. No one predicted the area either: Southeast Asia.

Despite these momentous structural changes in the ways in which the IMF extends its assistance, the details of the decision making processes have not been altered for more than half a century. The IMF has a Board of Governors. It includes 1 Governor (plus 1 Alternative Governor) from every member country (normally, the Minister of Finance or the Governor of the Central Bank of that member). They meet annually (in the autumn) and coordinate their meeting with that of the World Bank.

The Board of Governors oversees the operation of a Board of Executive Directors which looks after the mundane, daily business. It is composed of the Managing Director (Michel Camdessus from 1987) as the Chairman of the Board and 24 Executive Directors appointed or elected by big members or groups of members. There is also an Interim Committee of the International Monetary System.

The members' voting rights are determined by their quota which (as we said) is determined by their contributions and by their needs. The USA is the biggest gun, followed by Germany, Japan, France and the UK.

There is little dispute that the IMF is a big, indispensable, success. Without it the world monetary system would have entered phases of contraction much more readily. Without the assistance that it extends and the bitter medicines that it administers - many countries would have been in an even worse predicament than they are already. It imposes monetary and fiscal discipline, it forces governments to plan and think, it imposes painful adjustments and reforms. It serves as a convenient scapegoat: the politicians can blame it for the economic woes that their voters (or citizens) endure. It is very useful. Lately, it lends credibility to countries and manages crisis situations (though still not very skilfully).

This scapegoat role constitutes the basis for the first criticism. People the world over tend to hide behind the IMF leaf and blame the results of their incompetence and corruption on it. Where a market economy could have provided a swifter and more resolute adjustment - the diversion of scarce human and financial resources to negotiating with the IMF seems to prolong the agony. The abrogation of responsibility by decision makers poses a moral hazard: if successful - the credit goes to the politicians, if failing - the IMF is always to blame. Rage and other negative feeling which would have normally brought about real, transparent, corruption-free, efficient market economy are vented and deflected. The IMF money encourages corrupt and inefficient spending because it cannot really be controlled and monitored (at least not on a real time basis). Also, the more resources governments have - the more will be lost to corruption and inefficiency. Zimbabwe is a case in point: following a dispute regarding an austerity package dictated by the IMF (the government did not feel like cutting government spending to that extent) - the country was cut off from IMF funding. The results were surprising: with less financing from the IMF (and as a result - from donor countries, as well) - the government was forced to rationalize and to restrict its spending. The IMF would not have achieved these results because its control mechanisms are flawed: they rely to heavily on local, official input and they are remote (from Washington). They are also underfunded.

Despite these shortcomings, the IMF assumed two roles which were not historically identified with it. It became a country credit risk rating agency. The absence of an IMF seal of approval could - and usually does - mean financial suffocation. No banks or donor countries will extend credit to a country lacking the IMF's endorsement. On the other hand, as authority (to rate) is shifted - so does responsibility. The IMF became a super-guarantor of the debts of both the public and private sectors. This encourages irresponsible lending and investments (why worry, the IMF will bail me out in case of default). This is the "Moral Hazard": the safety net is fast being transformed into a licence to gamble. The profits accrue to the gambler - the losses to the IMF. This does not encourage prudence or discipline.

The IMF is too restricted both in its ability to operate and in its ability to conceptualize and to innovate. It is too stale: a scroll in the age of the video clip. It, therefore, resorts to prescribing the same medicine of austerity to all the country patients which are suffering from a myriad of economic diseases. No one would call a doctor who uniformly administers penicillin - a good doctor and, yet, this, exactly is what the IMF is doing. And it is doing so with utter disregard and ignorance of the local social, cultural (even economic) realities. Add to this the fact that the IMF's ability to influence the financial markets in an age of globalization is dubious (to use a gross understatement - the daily turnover in the foreign exchange markets alone is 6 times the total equity of this organization). The result is fiascos like South Korea where a 60 billion USD aid package was consumed in days without providing any discernible betterment of the economic situation. More and more, the IMF looks anachronistic (not to say archaic) and its goals untenable.

The IMF also displays the whole gamut of problems which plague every bureaucratic institution: discrimination (why help Mexico and not Bulgaria - is it because it shares no border with the USA), politicization (South Korean officials complained that the IMF officials were trying to smuggle trade concessions to the USA in an otherwise totally financial package of measures) and too much red tape. But this was to be expected of an organization this size and with so much power.

The medicine is no better than the doctor or, for that matter, than the disease that it is intended to cure.

The IMF forces governments to restrict flows of capital and goods. Reducing budget deficits belongs to the former - reducing balance of payments deficits, to the latter. Consequently, government find themselves between the hard rock of not complying with the IMF performance demands (and criteria) - and the hammer of needing its assistance more and more often, getting hooked on it.

The crusader-economist Michel Chossudowski wrote once that the IMF's adjustment policies "trigger the destruction of whole economies". With all due respect (Chossudowski conducted research in 100 countries regarding this issue), this looks a trifle overblown. Overall, the IMF has beneficial accounts which cannot be discounted so off-handedly. But the process that he describes is, to some extent, true:

Devaluation (forced on the country by the IMF in order to encourage its exports and to stabilize its currency) leads to an increase in the general price level (also known as inflation). In other words: immediately after a devaluation, the prices go up (this happened in Macedonia and led to a doubling of the inflation which persisted before the 16% devaluation in July 1997). High prices burden businesses and increase their default rates. The banks increase their interest rates to compensate for the higher risk (=higher default rate) and to claw back part of the inflation (=to maintain the same REAL interest rates as before the increase in inflation). Wages are never fully indexed. The salaries lag after the cost of living and the purchasing power of households is eroded. Taxes fall as a result of a decrease in wages and the collapse of many businesses and either the budget is cruelly cut (austerity and scaling back of social services) or the budget deficit increases (because the government spends more than it collects in taxes). Another bad option (though rarely used) is to raise taxes or improve the collection mechanisms. Rising manufacturing costs (fuel and freight are denominated in foreign currencies and so do many of the tradable inputs) lead to pricing out of many of the local firms (their prices become too high for the local markets to afford). A flood of cheaper imports ensues and the comparative advantages of the country suffer. Finally, the creditors take over the national economic policy (which is reminiscent of darker, colonial times).

And if this sounds familiar it is because this is exactly what is happening in Macedonia today. Communism to some extent was replaced by IMF-ism. In an age of the death of ideologies, this is a poor - and dangerous - choice. The country spends 500 million USD annually on totally unnecessary consumption (cars, jam, detergents). It gets this money from the IMF and from donor countries but an awful price: the loss of its hard earned autonomy and freedom. No country is independent if the strings of its purse are held by others.

In an interview he granted on April 14, 2005 to the Washington File, produced by the Bureau of International Information Programs, U.S. Department of State, John Taylor, outgoing Under Secretary of the Treasury outlined the Bush administration's vision for the International Monetary Fund (IMF).

The IMF, he said, "assess the economic policies of countries that do not need the fund’s resources ... (This) would allow the IMF to signal its approval or disapproval of, and provide markets with a clearer view of a country’s economic policies ... (Other reforms would be) the inclusion of collective action clauses in sovereign bond issues and 100 percent debt forgiveness for the most impoverished countries ..."