Abstract
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RESEARCH QUESTION: To what extent should the state intervene in Central/Eastern European (CEE) public/private sectors in response to impacts during the 2007-2009 recession.?
ISSUES.
The 2007-2009 recession has had world repercussions. This paper examines Central and Eastern Europe, hereafter CEE, attempting to dissect the system impacts likely to create debate regarding the appropriate state/government intervention having potential to address underlying causes of political, economic and social state outcomes.
PUBLIC VS. PRIVATE.
Central to the discussion is what structures and processes inhere to the public/private sectors. Historically, states have evolved from public to hybrid mixes of the public/private dimensions. Computing the mix typically includes the legal separation, the cost distribution, the revenue sources and the conceptual proclivities of societies. CEE has evolved from Soviet block centralization aligned either within state boundaries or in concert with external block authorities such as GOSPLAN, CMEA, Soviet Communist Party, and hierarchical state constructions. Soviet block members were assigned responsibilities for the external collective, while remaining, partially, if not mostly, responsible for internal affairs. Militarily, the Warsaw Pact acted as collective defense while depending upon block inputs of materiel and personnel.
Post 1989 perturbations have evolved in market economy directions. This occurred as ex-trading relations deteriorated and CEE governments elected independence and self-determination. Second, state enterprises often lost their purposes, and governments elected to follow, somewhat unequally, the Washington Consensus. This deregulated prior state relationships and invited the introduction of market systems. Lacking initial banking systems investors were invited in resulting initially in purchases of government T-bills and bonds, and after time, loans to the private sector. FDI was slow to start, and occasionally painful in entering joint ventures due to different mindsets. Attractive, low interest loans were made available by the IMF, WORLD BANK, and other lending agencies.
At the time of the 2007-2009 recession, CEE had incurred substantial public and private sector debt often paid in foreign currency. As the recession descended, western creditors, largely banks, incurred their own home demands for redemptions, CEE debtors found themselves vulnerable to weakening debt repayment forcing central banks to expend foreign currency reserves from current accounts, in most cases, Russia being an initial exception, depleting the potential to fund increasing shortages of liquidity among CEE central banks.
The primary issue thus becomes how CEE states will bolster economic development while attempting to project growth rates that will compensate citizens for declining demand for goods and services (jobs) and to, accommodate increased budgetary demands for social safety net payments.
Antecedents to the recession are complex. From a political standpoint, CEE governments have been buffered almost at each election by an unhappy, if not angry, electorate. With few exceptions, voters have voted status quo governments out. The equation has been largely to shift from center left to center right or vice versa. While economy has been seen as a negative post-1989 outcome, perhaps only Poland, and partially the Czech Republic have been less anguished with their governments.
Despite a possible groundswell of political and social urgency for governments to become more active in the conduct of their economies and return of government to an active role in governance, a certain malaise has been attributed to CEE capacities. Despite nostalgia among some who muse about the economic benefits of life under Communism, there seems little CEE enthusiasm for revivification of such state involvement by government. Having experienced years of dirigiste authority in CEE, citizens may not support an enhanced role by government directly, through law or funding provisions, toward reconciling the public/private interface.
THEORY.
Paul Krugman points out if the recession terminates, matters of depression economics will not subside. James K. Galbraith asserts that the American experience has been a struggle among Keynes, Franklin D. Roosevelt and Milton Friedman, while Akerlof and Shiller argue that “animal spirits” inform significant portions of economic empiricism, particularly moral hazard and perverse incentives. Politically, the public/private conundrum constitutes a troubling cacophony of voices in Europe and elsewhere. The CEE response is not entirely anchored in economic tradeoffs. Demography has tempered policy dynamics in pensions, healthcare, employment/unemployment, welfare and immigration. While western Europe offers both political sides of the dichotomy, CEE has taken as given, a continuing social safety net. Yet CEE, amidst deficit public budget spending has tended toward direct public support for such programs. Lesser attention, perhaps, has addressed public indirect support in the form of subsidies, tax exemptions, tax reductions and relaxed or absent regulation. Financial markets have now exacerbated several conceptual components of the public/private tradeoff: mergers and acquisitions; housing support; mortgage support; rating agencies and unregulated derivatives, particularly consolidated debt obligations. Allegations abound, ex post, that private financial agents have excoriated public trust in awarding herculean bonuses to those who sapped financial agents, their counterparties, and the public of trillions of hard currency. The resultant impact on economic production and services has reduced job levels precipitously.
The 1930s depression brought about legal and regulatory mandates toward mediating volatility of economic cycles. The current recession has raised the spectre of reform, both publicly and privately. Conservatives attack invidious acts by the public sector; liberals excoriate markets and weakly regulated entities as democracy without responsibility.
The paper will examine political, economic and social shortcomings in CEE, paying particular attention to the popular nexus of conflict: that government, and particularly government bureaucracy is failing in its duties; secondly, that solutions for reform must dissect an expanding public legitimacy that takes a direct posture in the public/private interface vs. a regulatory posture whose tools may include carrot/stick approaches buttressed by consistently applying formal standards across sectors.
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