Post-Soviet countries including Eastern Europe and the Balkans, as well as Turkey, seem anchored in gerontocratic leadership playing out years of autocratic governments mired in rent seeking with oligarchs. This contrasts with western Europe recently led by younger leaders attempting to reform traditional political parties imbued with traditional left and right ideologies.
This paper examines potential causes of discontent with political economy highlighting conceptual ambiguities and unanswered questions. It concludes that “muddling through” is more likely an explanation than paradigmatic certainty.
As the post-Soviet states emerge into independence many have chosen EU membership or are seeking admission. At the same time, certain EU members, tantalized by populist anxieties, are either seeking to modify the political economies of the EU (Poland, Hungary, Austria and Brexit UK) or are seeking further independence from EU ‘elitist’ prescriptions. At the center of these aggravations are a reaction to European migration policy (labor being one of the four pillars of EU cooperation) and globalization, the seeming dragon of financial authority threatening the sovereignty of EU members.
Apparently undismayed by globalization, former eastern bloc countries have acceded to the EU, or as in the Balkans, are hoping to enter as an entire region (Montenegro, Serbia, Kosovo, Bosnia and Herzegovina, Albania and Macedonia). Thus, their enthusiasm for the EU contrasts with several EU members who are seeking to protect sovereignty while differing in certain foreign policy preferences particularly toward Russia, wanting not to exclude political economic transactions now constrained by western sanctions. The Czechs and Slovaks seem reluctant to spoil future Russian trade or FDI. Italy, of course, has just shifted to a largely populist ideology becoming the first to abandon liberal prescriptions while still a member of the EU and euro zone.
The mixture of politics and economics has, thus, shifted from the post-World War II prescriptions, along with a perception that globalization and, now, technology have exacerbated a departure of liberal ideology. Often this is described as illiberalism. At the same time, Donald Trump’s tactics have sown disbelief on Europe in general and the remaining non-populist EU members such as Germany and France. The Dutch may be added since they voted against populism while being less than enthusiastic about EU migration policy.
Populism vs. Liberal Democracy
Underlying the dichotomy between those favoring some form of populism vs. those preferring liberalism are two factors: identity (the threat toward national identity allegedly is threatened by overflows of migrants penetrating national boundaries) and sovereignty, (reduction of national sovereignty triggered somewhat by a mix of anti-elitism and anti- cosmopolitanism particularly replicated by the EU toward its national members). This can be seen as a binary choice influenced by many factors. Millennial youth are discontented with employment prospects; adults in their early fifties with primarily high school education, are anxious about employment futures arguing that globalization has pushed them to the bottom with little help from labor unions or government assistance. Though Europe in general has significant welfare state support, this reduces take-home pay and reduces a sense of identity in a collegial profession or vocation, something that had existed for generations. Without institutional support, Brexiters and other continent workers have challenged the status quo by voting against continued elitist policies.
Income inequality, increasingly showing a gap between rich and poor/middle class, attacks both identity (economic shifts such as reduction of manufacturing yielding to increased service occupations) and job security (increasing unemployment without state remedial subsidies). Job security is further threatened by artificial intelligence, automation and robots. MIT estimates that 60 percent of jobs are likely to be eliminated by these three factors. Most affected will be those jobs that are non-complex and routine. If work is boring, it will not be so for a robot. Either certain workers will work shorter hours or not at all. Kurz arbeit (part-time work) is increasing. Unfortunately, the younger generation suffers high unemployment rates along with the over-fifties. Employees in the future will be paid to think rather than answer repetitive questions. Only in places like Denmark, has government stepped in and created jobs while adding in training. The emphasis on human capital will be crucial as states endeavor to develop their economies and deal with skill gaps.
Crucially, the result of a disconnect between human capital and government or those performing development and societal planning, is a festering lack of confidence toward institutions, politicians and state functionaries. This disconnect has grown over many generations as societies have attempted to switch from top-down management to bottom-up management. Foucault has observed that citizens have more power than they think they do. Many societies continue to practice autocracy despite the absence of monarchies and the slow elimination of dictators. Politicians have practiced patriarchy or in a few cases matriarchy. Electoral suffrage has occasionally brought reform yet relationships between the governed and their governments have resulted too often in dependency. Some post-Soviet leaders have manipulated their incumbencies into lifetime jobs. Dr. Mahatir in Malaysia has now returned to governance at the age of 92. Erdogan in Turkey seems to incline toward the same model. And, there is Putin. The consequence can seem like elected monarchs.
In the meantime, in order to remain in power, such officials and their governments offer rents to oligarchs who respond by paying a certain amount of taxes to sustain the government. In the U.S., powerful lobbying ‘institutions’ tend to organize the passage and failure of federal legislation.Both Max Weber and Herbert Marcuse have argued that populations seem inured toward accepting rule by rulers behind closed doors as well as policies tending to enrich the private sector or retain the politicians. There is, of course, a line beyond which populations are not willing to endure. Since the ballot box system seems flawed, demonstrations are occurring challenging the status quo. As we study the behavior of millennials, we see three outcomes: one, a willingness to challenge the system; two, an inclination not to accept authority without objecting (voice) and an affinity for group action.
Paul Krugman, himself a Nobel-Prize winner, asserts in postulating about economic growth theory that economic models are ‘involved making assumptions about how unmeasurable things affected other unmeasurable things.’ Since economists are divided about the causes of growth, we turn toward other conceptual postulations.
We are influenced by the argument that institutions constitute the fundamental cause of long-term growth. Institutions are primarily endogenous (within) rather than exogenous (outside). The theory is that “Societies with economic institutions that facilitate and encourage factor accumulation , innovation and the efficient allocation of resources will prosper. Essentially the theory subsumes a related theory that political power ultimately determines the nature of institutions and that the group that maximizes power will influence if not direct the society’s institutions. Examples of institutional outcomes include “…democracy vs. dictatorship or autocracy …and constraints on political elites.”
Yet, de facto political power may differ from de jure (legal) power. Of particular interest is that power that affects distribution of resources. Thus, despite de jure power, de facto power may distribute resources differentially, most likely to those with actual political power. States may be constitutionally independent though unlike a constitutional monarch, they may be dependent upon a “contractual oligarchy” that through governmental rents benefits from resource distribution.
This line of thinking pays particular attention to institutions. Acemoglu, Johnson and Robinson pursue various characteristics and their link to reality. These are proximate characteristics much closer to outcomes (dependent variables). The logic of each variable is explained either to include each characteristic or rule it out. The authors indicate that institutions survive as most likely to be correlated with economic growth rather than to show a definite causative effect. Causation may eventually be more likely in the event of further future research by rigorously examining multiple examples. Other potential causes were eliminated by examining counterfactuals, reversals in causation (the effect was directly opposite to that expected), and/or changes over time. Those characteristics failing to meet the test included geography and climate, culture, luck, poverty traps, industrial technologies, religion, ideology, social conflict, labor markets, and financial markets. In each case these possible causes were unable to explain exceptions thus limiting their usefulness as causative factors.
The authors tested the institution model against Korea recognizing the economic differences ultimately displayed by both North and South Korea. They further tested the theory against colonialism (particularly that of the British and French) and came to a similar conclusion regarding the correlation of economic outcomes. The authors admit, however, that further econometric tests would be necessary to explore the probability that institutions are critically important (that is that they are statistically important). As to why this might be true they argue that the likely cause is the balance or imbalance between de jure power and de facto power. One can have a constitution but not follow its process thus, negating its outcomes. That can be since the de facto power has greater power and exercises this with compliance of the government. The result can then be, that the de facto power benefits from the distribution of rents or largesse of the government and pays off the government with a certain amount of taxes or other payments for its monopolistic set of assets. If the government does not regulate monopolists, it gets what it pays for: oligarchy. The desirable goal then, might be to coalesce de facto power with de jure power buttressed by constitutional government and the rule of law.
Armenia has recently undergone a revolution and is in the process of seeking keys to democratic success. The question remains, how does one shift from an autocratic regime to a democratic regime? Denmark has linked change to negotiation among government, labor and human capital. Estonia is now seeing a return of its expatriates at a higher rate than the current emigration rate. Partnerships can be important. The Irish, 20 years ago, were known for potatoes and fence posts. Emigration was exploding. The Irish asked themselves: where do we want to be in 20 years? They formed a triumvirate of government, business and education to coalesce their efforts around producing computer programmers. They talked Irish expatriates into returning; joined the EU (reducing tariffs) and set the lowest corporate tax in all of the EU (much to the displeasure of other EU members). They then exported info tech applications and programmers to Europe. The 20 years are over and they are now thinking about the next 20 years.
Small State Models
Lacking general convincing economic models, Credit Suisse has analyzed the characteristics of small states. Small states may be defined as those having populations of 9 million persons or less. This includes 22 of the 28 EU members as well as others. Credit Suisse bases its analysis on an output model that may be seen as a dependent variable. The search is still on regarding the independent variable or variables.
Nominal GDP Per Capita (median): small states slightly exceed the medium and larger states at an estimated per capita income of 6,700 USD. With respect to wealth (assets), per capita, 6 states of the top 10, are small states. On the basis of the UN Development Index (HDI), among the older small states, Norway tops the list. ‘Old’ small states make up 11 of the world’s top states. Nevertheless, among the new small states (gaining recent independence), Croatia, Lithuania, Latvia, Estonia and Slovenia are moving upward in their rankings..
Credit Suisse constructs a ‘fractionalization’ score derived from Alesina and Spolaore that measures ethnic, religious and linguistic diversity weighted equally) between small and larger countries. Small states emerge less fractionalized and more homogenous. Data are from 2001, not necessarily reflecting recent migration flows. Credit Suisse constructs a globalization index embracing economic globalization, social globalization, corporate openness, and technological globalization. The globalization index follows the Foreign Policy/AT Kearney methodology. Luxembourg, Singapore, Switzerland and Ireland lead the data. Of the top 20 countries ranked in this methodology, 85% are small states. Though trade idiosyncrasies might reflect particular state exports subject to international trade volatility, the data suggest that small states correlate trade openness and per capita income. Remissions, for example, that act as exports, may be vulnerable to transnational economic swings such as construction in Russia or Spain. Nevertheless, 58 states over 33 years, indicate lesser total vulnerability. The temporary conclusion can be that small states are more homogenous rather than heterogenous. A natural resource such as oil and gas, however, adds to vulnerability, causing a resource curse, as in Azerbaijan. Credit Suisse warns that ‘new’ small states may experience time and difficulty in constructing solid institutions experienced earlier by older small states.
While economists experience ‘unmeasurable’ factors, human development factors share the same malady. Yet Credit Suisse constructs an intangible infrastructure consisting of political, legal and socio-economic measures. Specifically, these include education, healthcare, finance, business services and technology. Levels of intangible infrastructure appear linked positively to GDP per capita. Education may be critical. Aggregating the measures, and adding the aforementioned measures, a country Strength index is created. Thirteen of the top 20 states are small states. Though diversity exists among the states, Credit Suisse concludes: ‘a sense of strategic planning, and an awareness of the impact of markets, trade, immigration can, with institutional capability, develop a small country.’
We conclude that although measures of development success are somewhat inchoate, there is an observable pattern (rather than a statistical reliability) that small state characteristics differ from larger states, particularly those that are not afflicted by the ‘resource curse.’ Institutions appear to be critical and trade can burnish the lack of natural resources. Human capital offers a level of comparative advantage if carefully nurtured. Perhaps, all that remains is political will.