Eastern approaches

Ex-communist Europe

Well done Warsaw

Poland's debt trumps Germany's and America's

Feb 8th 2012, 16:50 by E.L.

ANYONE who takes financial-market indicators as a guide to the real world must be mad or a banker. But it is still interesting to note, as Bloomberg has just calculated, that on risk-adjusted returns Polish government bonds are a better bet than either German bunds or US Treasuries. The Bloomberg ranking gives Poland the top spot with an 8.3% return in local currency in the three years to February 6th, against 4% for German government debt and 3% for the US paper. Polish debt was only ninth in total returns, but shot up the index because of its lower volatility.  

That is better news for lenders than taxpayers: Polish borrowing costs are still quite high by international standards, at around 6%. But it is a feather in the cap for Poland's finance minister, Jan Rostowski, who has piloted the country almost unscathed through the economic storms in the euro zone.   

Poland is striving to get the budget deficit below 3% of GDP this year, which is a condition of eligibility for euro zone entry in 2015. However Mr Rostowski is backing away from that target: he told the BBC that Poland would join the common currency "only when it is safe to do so".

Along with AA- credit ratings for Estonia and the Czech Republic (better than Italy's), the Bloomberg calculations help highlight the relative economic strength of countries that were once part of the continent's "east European" periphery.

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Tomas Marny

Congratulations to Poland! Every news that can improve reputation of the region is welcome.

As for the Euro adoption, I'm known supporter of common European currency. On the other hand I understand the opinion of supporters of postponing entry into EZ who argue that after the fall of communism, CE countries had to drastically (unnaturally) devalue their currencies to gain convertibility and that with structural economic changes and increasing competitiveness, the gradual revaluation of CE currencies should be the main way of convergence (with early Euro adoption, the only way of convergence would be inflation). That's why recent speculative trades with CE currencies that lead rather to devaluations are pretty annoying but I hope that exchange rates will return back to expressing economic fundamentals. But it would be nice if non-EZ EU members should enjoy advantages of SEPA earlier than in October 2016 (EZ countries will have it finalized in February 2014) - see here.

And, as for the improvement of the CE region's reputation, the important goal should also be to improve behaviour of citizens taking advantages of the open borders - as the irritation with their misbehaviour (noise, bad driving/parking, sottishness, ghettoization, petty crime, etc.) comes from many WE countries resulting in demeaning initiatives like the recent Wilders' web Report your Central and Eastern European and as there is no smoke without fire, I guess that new EU members should prepare a campaign to persuade their citizens how important their good behaviour abroad is for reputation of the region.

wersy2 in reply to Tomas Marny

And what jurisdiction does Polish goverment have to enable them to take care of the behavior of its citizens abroad? The matter is in hands of the Dutch police.

For someone who would not give a damn about his own dignity, what importance does "regional/national reputation" even have? Or should we form a citizen's militias and follow the wrongdoers throughout the Europe to tech them manners?

Tomas Marny in reply to wersy2

My point was not repression (as Wilders' page promotes) but rather educational campaign in both typical source and typical destination countries to prevent the misunderstanding and increasing hatred.

I guess that especially young people often do not realize that when abroad, they are some kind of ambassadors whose behaviour contributes to how the country/region is perceived. They might not even realize that various countries have not only different written law, but also unwritten rules of coexistence that may be fully or partially different than in their home countries but that they should be careful to stick to. On the other hand, in destination countries, people should be presented positive examples of integration, not only negative.

So I can imagine a EU-wide campaign (it may even extend current services of EURES that already gathers information for supporting job mobility in EU) and address schools, job centres, tabloid press and other places where the target groups may be found.

Valli2 in reply to Tomas Marny

I agree with your point that expatriates tend to be viewed as reprentatives of their home country, when judged by natives of their host/new country. However the immigrants need not behave worse on average than the natives to harvest as a group hatred from the likes of Wilders. I would like to maintain that such "collective punishment" qualify as racism and thus be punishable according to the criminal code of most counties of western Europe. In my native country, Iceland, I suppose Polish immigrants make up more than 2% of the total population of Iceland. Most of them are very nice people, but a few are criminals. And yet some Icelanders talk about Polish people as being in some way worse than us, the natives. There in deed need not be any valid reason to view immigrants as worse than the natives. It is enough, that some of the natives are prone to prejudice. Incidentally, I have noticed bad talk of immigrants amongst Icelandic homeless alcoholics. I suppose they fear that immigrants may compete with them for social benefits. There will always be a certain minority of the host country´s natives, who bad mouth immigrants. And those who do are usually predominantly people, which in American English is termed as "trash".

Today, I learned about an Icelandic electrician, who has just found work in Denmark after searching for it for one and a half years. His wife is a student in Denmark. Somehow this electrician thinks he knows Danish society well enough to say, that a high rate of unemployment in Denmark is the fault of (non Icelandic) immigrants. He also maintains that nobody buys non organically cultivated vegetables in Denmark, except "immigrants". By immigrants I believe he is refering to immigrants from Eastern Europe and places further off. Needless to say, that all vegetables are "organic", and vegetables grown by "the organic principles" have never been proven to be more healthy than other vegetables. I also very much doubt, that the majority of native Danes, choose to buy "organic food" and pay for it a much higher price than for traditional food. So I Googled it: In 2003, 5,6% of the Danish population chose "organic food" (like there is any "inorganic food"!!!). I very much doubt, that in 8 years that proportion has gone over 90%, which shows how wrong the perceptions of common people can be, when they let lose their prejudice.

Forlana in reply to Valli2

>Valli2: However the immigrants need not behave worse on average than the natives to harvest as a group hatred from the likes of Wilders.<

Very good reply, Valli2!

Tomas, I am afraid no information campaigne will ever change the attitude of PVV. Nontheless beside PVV voters there is an overwhelming margin of no-PVV voters. I found many encouraging comments here: http://www.dutchnews.nl/news/archives/2012/02/problems_with_poles_report...

Also, no info campaigne will change the attitudes of those Poles who lack the manners, misbehave, in short - exactly: misrepresent the rest.

Finally, Tomas, my Czech friend, for Heavens sake, have some lenience for your precipitate, hot and party-loving North-Eastern neighbours. It is not easy to be as perfect as you are. :)

wersy2 in reply to Tomas Marny

I still don't quite get what you mean. What kind of an "education" are you talking about?

I think people all over Europe are aware that it's wrong to throw trash on the streets, evade taxes or to scream insults at the top of their lungs in the middle of the night while drunk. The problem is, some won't do it anyway and given that it would take decades for any "education", even if done rightly, to start working, the only short-term solution are the "represions" and this can only be done at the host nation.

I don't know how all this talk of being an "ambassador" would do any good, as people who do such things have no respect for their own dignity, so how would you expect them to refrain themselves from it to the benefit of others? Maybe for some Oriental cultures which put more emphasis on collectivism this type of argument would have some sonse, but in Europe it's a lost cause.

Tomas Marny in reply to Forlana

Hello Forlana! I'm afraid that the encouraging comments are mostly written by those immigrants who feel touched. Wilders may be an extremist but I don't think that he has a priory anti-CEE attitudes as he has married a Hungarian woman.

With the re-introduction of visa barriers for all Czech citizens by Canada several years ago due to misbehaviour of Czech passport holders of Roma origin, many people here have realized how much damage to innocent decent citizens can be caused by behaviour of passport holders of their country abroad. I guess Romanians and Bulgarians just experience the same in the form of the recent troubles with their Schenghen space entry. In fact, Roma organizations have realized it too and thus often blackmail politicians that if they will not be given enough welfare, they will go to England to bring shame on the country.

So in general it's a fairly serious issue that cannot be taken as solely private. We can see that the debt troubles in Europe worsen relationships among European nations in general (see e.g. recent open anti-German protests in Greece or British and Dutch animosity towards Icelanders due to their refusal of paying failed bank compensations) and if trends continue in this direction, we can reach the point that the public opinion in all the nations will be that it would have been better if no European integration (and/or enlargement) had ever happened. Which would be pity at best.

There is obviously no immediate and definitive solution. But still I think that you are too pessimistic if you say that there is nothing that can help. Education and positive role-model examples could improve the situation a bit, at least as a form of countering the one-sided PVV propaganda. I also believe that many people would accept some kind of selective restrictions of free movement (e.g. for people with repeated criminal records or for benefit-seeking "tourists") in exchange for decent citizens being welcome all around the continent.

PS. Czechs are also party-loving but they do not have such passionate attitude to their own compatriots when abroad so they are less visible as they don't create such big communities but are rather dispersed.

Tomas Marny in reply to wersy2

As I mentioned, various countries may differ in what is OK and what not (e.g. it's well known that southern countries are more tolerant to noise disturbance while rules in German-speaking part of Switzerland are very strict). Honestly, how many people read something about the target country before leaving?

The educational campaign can have a form of some of TV spots with slogans and leaflets (with references to information sources) similar to the campaign for good driving.

European cultures do not put sense on collectivism, but there is strong sense of nationalism so I believe that appealing to being good representative of the nation could work...

Forlana in reply to Tomas Marny

Hi Tomas. You make some good points. Nonetheless it seems to me that much efficient method is the one proposed by wersy2. Which of course does not exlude EU-wide information campaigne on the benefits the free flow of workforce has brought to 'old-EU'. I am pesimistic about possible effects of information campaigne entitled 'behave correctly' in countries being the source. Such campaigne is usually started by parents when a child starts to talk... then it is highly effective :)
Best to you.

wersy2 in reply to Tomas Marny

"European cultures do not put sense on collectivism, but there is strong sense of nationalism so I believe that appealing to being good representative of the nation could work..."

Yeah, you may have a point to some extent, the football hoolies are particularly known to wave the national flag whenever they can so maybe it'd be worth to ensure they also bear in mind that it should come with some sense of responsibility. But we both know that it won't be easy and might as well end up as a futile cause:)

As for the fifferences in customs I think everyone is well aware of the rule that says that when in Rome, do as the Romans do. As customs vary regionally, the respective host regions should emphasise to newcomers what type of behavior they find especially disturbing. It's also up to them to set up laws
which would protect their citizens in case of education not being enough to prevent misbehavior.

mikeinwarsaw

Just a PS: interest rates in Poland are high not only because it is not in Euroland but also because, through lack of a balanced budget, extensive government borrowing drives up the interest rates to the private corporate sector as banks choose to lend to government (perceived to be a lower risk) than to businesses. So real money is wasted on uncontrolled unproductive government spending instead of on modernising and growing the economy (which would increase the tax base).

Jasiek w japonii in reply to mikeinwarsaw

No, a crowding-out is not taking place. What appears a crowding-out to you, who are thinking a saving dog wags its investment tail, is not really a crowding-out. Even if the government didn’t borrow that much, the speculative demand for money was so high that it would seek other assets with so high liquidity that the transactions-demand for money would be neglected as largely as today. The interest-rate gap in question is wide today – throughout the world – because the speculative demand for money is robust due mainly to the present haphazardly liberal economic framework keeping the income velocity of money high and thus the transactions- (and precautionary-) demand for money can only sluggishly expand even if the money supply increases.

mikeinwarsaw

@jacekwjaponii

Your blog comments are wonderfully technical jargon, they read like an insider's gospel! How about writing in plain English?

The fact is that back in 1989 Poles did not have private or corparate savings. The ex-communist country and its people were bust. At present Polish private sector cash reserves (real money put aside from net profits) are still very, very small. Buying businesses outside is fine in theory but the shortage of capital for investment torpedoes such moves on a large scale. I work closely with Polish owned manufacturing businesses making capital goods for the export and domestic markets. All bitterly complain about the banks' lending policies, being forced to either hold back on investments or downscale them due to the lack of spare capital and lack of credit on reasonably acceptable terms. Given the lack of investment incentives, the return on investment has to be exceptionally high in Poland if the investment is to be funded from bank or state agency credits. That is why its a lot less stressful to simply deposit spare corporate monies and get a 6% return at zero risk. Speculative "hot monies" pouring in and out of Poland and other ex-communist States simply aggravate the situation and do nothing for the local real economy.

The private citizen in Poland has few, if any, savings. Earnings are spent on life's necessities with most consumer goods being bought on credit at ruinous rates. Which has created a consumer debt mountain that has to be paid off. If the economy goes into decline or worse still recession then a Baltic States scenario is highly likely, rather than a southern European one. Fortunately the property bubble has already burst though of course most home "owners", if they bought in the past 7 years (from EU entry), now have negative equity, ie they owe more to the bank lenders than their properties are worth. That happens in many countries where appropriate legislative controls are not fully in place (such as a speculation tax on rapid property purchases/sales) and where credit is "too easy".

The Polish government's activities can be best described as "the less the better" from the business investors' point of view. Government administration is grossly overbureaucratic and expensive and a visible burden and drag on the economy. State aided/owned companies are given preferential treatment with massive amounts of real money (from taxes) wasted on State sector enterprises eg LOT or PKP or the coal mines. Fortunately the EU Commission is putting a stop to those subsidies and imposing a demand for paying back such subsidies.

The fact is that the private sector in Poland succeeds despite and not because of government and the financial sector.

Jasiek w japonii in reply to mikeinwarsaw

[1/2]

Mike,

The postulate of ‘the less the better’ is not legitimate. It only focuses on size and not contents or portfolio. The postulate comes from the wrong impression under which you are about the government’s role which should be portfolio-changing function in the first place.

A couple of terms I cited in my previous reply to you might have appeared technical enough to take you aback indeed. I think the marginal propensity to consume and the marginal efficiency of capital bothered you. The two notions are the most essential when you are to analyse a relatively short-term economic dynamics of a country, and you can’t avoid them. But, both are intuitionally understandable and require no difficult mathematics for the purpose.

The facts that you described in the second paragraph must be really frustrating to you, but they are just normal for any developing economy. The low pay growth or hardships you face at the windows of public offices must be making mad. Meantime, those ‘sticky’ factors hold the aspect of stabilising the Polish economy by forestalling a large aggregate investment growth in each period. Most of the increment of investment in the present period needn’t be replaced soon (e.g. capital equipment that will last long, which you must be well aware of), but businesses need to put aside some of the proceedings for depreciation so that their net income will be lower by that much over some consecutive periods. The lower net income will reduce consumption by that much (i.e. a lower propensity to consume at your net-income level). A large aggregate investment in the first period will thus make it difficult to materialise a large aggregate investment in the following periods by that much. In that case, a large aggregate investment in the second period will thus make it more difficult to materialise a large aggregate investment in the following periods by that much. Therefore, large investment growths over consecutive years may someday make it impossible for the economy to grow unless sufficiently large innovations take place in the way that productive investment will outrun unproductive investment to shift the conditions on net income and thus consumption, i.e. the marginal propensity to consume, to further the growth frontier. That is, what appears ‘a success of the private sector in Poland’ to you might not be a success but turn to be a lethal failure actually; it depends on the above conditions.

The most tangible problem in case of Poland with the 20-yr average growth of as much as 4.4% (4.4% is very high for ‘20-year’ average) is the fact that employment remains persistently low, i.e. unemployment is annoyingly high, at equilibrium with the present level of the effective demand. This problem may partly come from the factor I described in the previous paragraph but, considering 4.4% as not necessarily ridiculously high for 20-year average, largely come from some misallocation of investment; the aggregate investment is not efficiently allocated to increase employment at home. Employment is a function of effective demand. While a higher effective demand will give higher employment ceteris paribus, a more efficient allocation of investment will change parameters to increase employment with the same effective demand. An allocation of investment is described by the schedule of the marginal efficiency of capital. A more efficient allocation of investment gives a situation in which productive investment outrun unproductive investment, which is described as an improved schedule of the marginal efficiency of capital (or, actually, the marginal efficiency of investment at home).

Jasiek w japonii in reply to mikeinwarsaw

[2/2]

It is the classical economics behind the Washington Consensus that has been forcing not only ex-communist states but also other developing and developed economies to aggravate the situation by encouraging each to recklessly increase investment to materialise a high growth over some consecutive years, for which Poland has been relatively prudent. This issue is largely political. Guys in the Polish authorities were inwardly doubtful of the classical Consensus and thought of it as very dangerous to pursue a higher growth unless they could implement a right reform agenda in the sense of the previous paragraph. (Actually, they tried to regulate the economic growth within what appeared to others a modest or rather boring range, which later turned to have been safe when the Great Recession was prevailing throughout the world). But, such an agenda (incl. ‘appropriate legislative controls’, which you mentioned) was politically extremely hard to implement in full while the classical economics was dominant. On the contrary, a classical reform agenda with hasty and haphazard globalisation, deregulation and privatisation was forged in the form of the Washington Consensus. (It is ironic that one of the most notable advocators of the crazy classical macroeconomic movement was a Polish-American who was an economic advisor to the Ronald Reagan administration). The present Great Recession since the Lehman shock may diminish the classical economics’ triumphalism. Now, some are putting forward New Keynesianism, but the theory is also largely different from Keynes’ original General Theory; for one, New Keynesians completely overlook what I described in the previous paragraph (i.e. stock or portfolio) and are always talking about the authorities’ straightforwardly increasing the aggregate demand by a higher investment level (i.e. flow) in the present situation.

Contrary to your assumption, the Poles actually save much, or I should say that the Poles as a whole save much. You are thinking upside down that savings is what you do not consume out of your ‘wages’ of the present period. That’s wrong. In such a macroeconomic issue, savings is what the entire Polish households as a whole put aside their ‘entire income’ (in whatever form may be, e.g. wages, interest, dividends, rents, etc.) of the present period. When poorer households in Poland ‘have spent their earnings on life’s necessities with most consumer goods being bought on credit’, which is debt or diminished credit, ‘at ruinous rates’, other households in the Polish economy simultaneously increase their financial assets, which are increased credit, through the financial system at home and thus increase their savings. When poorer households have purchased goods (or services), it’s not consumption; they increased assets in the form of the purchased goods on debt. As those goods are consumer-goods, their resale values disappear immediately when they have purchased them (but accounting-wise at the end of the present period), and thus their debt remains and net asset disappears by that much. The Poles save much that way, i.e. the propensity to save is very high or, in other words, the propensity to consume is very low.

When you deal with macro-level dynamics, it requires a fundamentally different way of thinking from when you deal with micro-level dynamics. Keynes says something like we have to accept that policy-failures arises as an inevitable result of applying, to the macroeconomic dynamics, the maxims best calculated to make an individual richer by enabling him to pile up his claims to enjoyment he is not going to exercise.

Mike,

I was so careless when I was typing my last paragraph but one that I made it extremely misleading, I need you to accept some correction:

In the first sentence I should have said ‘higher-earning Poles save more than they should in a better state of equilibrium’ instead of saying that ‘the Poles as a whole save much’, and in the last sentence I should have said that ‘higher-earning Poles save much that way, i.e. the marginal propensity to save is very high or, in other words, the marginal propensity to consume is very low’, instead of saying that ‘the Poles save much that way, i.e. the propensity to save is very high or, in other words, the propensity to consume is very low’.

To put in order, from the dimension of flow, one big problem with the present Polish economy – or rather most of the developing economies throughout the world – is that the marginal propensity to consume has been (deliberately kept) low (by the classical thoughts behind the Washington Consensus and the IMF’s recent official - and not original - agenda) while the average propensity to consume is high (as just normal for a developing economy).

It is only the government’s fiscal policy and legislation that can increase the marginal propensity to consume. Even though that sort of reform is politically difficult, the government has to tackle the issue.

The government need to improve both the dimension of flow (i.e. consumption and savings) and the dimension of stock (i.e. investment or asset portfolio) at the same time, and in the paragraph in question I intended to imply the former dimension.

Jasiek w japonii

Supplementing my previous comments again (especially replies to mikeinwarsaw):

Not only the state government but Brussels can give out right money through the European Union structural funding, because of what I am emphasising these days; the funding is aimed at deliberately helping inducing equilibrium at which productive investment will outrun unproductive investment throughout the union.

That is; while injecting money from the structural funding to an economy will by itself increase its domestic income as part of its short-term multiplier effects, what really matters more is its long-term ripple effects or long-term multiplier effects. With some alignment to the present fundamentalist form of capital-market liberalisation, we can expect that allocating the structural funding, funding for structural realignment or portfolio realignment, to investment within a euro-area economy like Slovakia and Slovenia may actively induce the whole of the monetary union to improve its schedule of the marginal efficiency of capital on condition that it is used for appropriate means, i.e. attempts to help inducing equilibrium at which productive investment will outrun unproductive investment; allocating it to investment within a non-euro-area economy like Poland and Hungary may actively induce it to improve its schedule of the marginal efficiency of capital on condition that it is used for appropriate means.

Now The Financial Times Deutschland quotes European Commissioner Mr Janusz Lewandowski as saying that Brussels is so far in short of 11 billion euros such that there will not be enough money to finance next year’s structural funding:
http://www.ftd.de/politik/europa/:wegen-strukturhilfen-eu-droht-riesiges...
Well, that’s a problem indeed, because it might cause two different negative effects: One is that not only the aggregate demand or domestic income (for short-term) but also the structural or portfolio realignment (for long-term) might lag behind by that much, which Mr Lewandowski is talking about. The other is that as Mr Lewandowski is a Pole his this remark might give a wrong signal to the European public as though Poland was lobbying within the EC for its own exclusive benefits as people tend to focus on the short-term aspect that the structural funding increases the aggregate demand or domestic income but to overlook the funding’s long-term effect as explained above, which should be the funding’s main purpose in the first place: It is probable, I fear, that some media will send biased reports based on that populist, yellow sort of mal-construing in some attempts to add to a negative image of Poland but eventually resulting in affecting both the short-run and long-run determinants of the entire European economy without realising it beforehand. (I believe that jealousy thus exists on some form of spontaneous optimism as part of what John Maynard Keynes calls animal spirits).

edwardong

Sounds like yet more LTCM type mathematics...

Jasiek w japonii in reply to edwardong

Yes it indeed is an LTCM-style mathematics, and the figures only reflect how long-term expectations, which, Keynes emphasises, are liable to sudden revision in the very famous Chapter 12 of 'The General Theory' (1936) as well as the Chapter 5, will probably develop in the immediate future ceteris paribus in terms of dynamics. That's why the author Edward says 'anyone who takes financial-market indicators as a guide to the real world must be mad or a banker', where he implies that a banker can be mad, while he as a close friend of Poland's foreign minister sounds rather over the moon at the same time.

beregi

East European periphery? Aren't we out of our sober and tiny mind a bit here? The eastern border of Europe is somewhere at the Ural mountains, isn't it, Boys? It is hardly an exaggeration to point out that the Check Republic is in the very heart of Central Europe (of course for those who did not miss their geography lessons). Following the stupid logic of the self-important West, Great Britain could also be deemed as a country somewhere on the periphery.
Anyway, long live the Poles!

Jasiek w japonii in reply to beregi

Try and read between the lines: The author Edward troubled to put the double quotation marks because he didn’t feel comfortable with the term, either.

By the way, don’t be surprised; Poland boasts as many as two geographical midpoints of Europe!
i.e. The northeastern town of Suchowola and the north-midland city of Torun.

read this:
"ANYONE who takes financial-market indicators as a guide to the real world must be MAD or a banker....as Bloomberg has just calculated, that on risk-adjusted returns Polish government bonds are a better bet than either German bunds (OMG GERMAN !!) or US Treasuries (US TOO ?)"

reading between the lines I see what beregi wrote about

Anglicus

Hopefully now this is the beginning of some new respect coming from the West of Europe towards the East.

mikeinwarsaw

Savings levels and cash reserves both among citizens and companies are still very low in Poland. The Government and Central bank and therefore businesses have to pay relatively high rates on international borrowings which discourages real world investment. After all why take a business risk when you can get a 6% return for zero risk and zero effort?
Most of Poland's recent growth has been caused by increased government spending and borrowing as well as an influx of EU infrastructure monies. Once the latter dry up what then? The fact is that the Polish economy as a whole is still relatively small and per capita GDP is very low. So there is much room for per capita growth provided that appropriate economic policies are implemented.
As to the effectiveness of the bi-national Jan Vincent Rostowski (born a Brit of Polish parents, with a Polish passport), yes he has done a decent job over the past 4 years but is he capable or sufficiently ruthless to push through all too necessary reforms? Preventing "hot monies" flushing in and then out of the Polish financial markets can only really be done by Poland joining Euroland. The Polish zloty devalued relative to the EUR and USD over 2 years ago. At it present levels it helps Polish export to be competitive. An influx of "hot money" looking for a higher return that US or German bonds will drive up the zloty, thereby undermining export driven industry. I am looking forward to a time when the Poland will at last have a balanced budget, Scandinavian style. Will that ever happen or will it go the way of Greece, Italy and Spain?

MilovanDjilas in reply to mikeinwarsaw

I must protest.

Italy's budget deficit was 5.3% in 2009 and 4.6% in 2010. We are waiting for the final 2011 figure, but it is estimated to be at 3.9%. This year's deficit is forecast for 1.6%. A small budget surplus is forecast for next year.
What are the comparable figures for Poland?

Now stop and think about how much interest we are paying in Italy on debt accumulated between 1978 and 1992 under the imperial leadership of Karol Wojtyla and just what our primary surplus has been over the last several years.

[1/4]

Mike, that must indeed be the way most people think in. However, I must say that you are missing one very important point and at the same time that you view is rather upside down. Let me elaborate (It will be rather lengthy, and I hope you will be patient enough to read all, for I’ll try to make it as plain as possible):

We can agree that ‘savings levels and cash reserves in the private sector are still very low in Poland’. Hence, as for the household sector, you may well assume that the propensity to consume is very high there, and I’d agree. One problem arises from this, which is that the households consume much of their (aggregate) income and save little. That’s the point you’ve cited, but it is normal to a developing economy. That is not a problem by itself.

On the other hand, you’ve forgotten to think of the marginal propensity to consume, which we could easily assume to be very low. That is, when the aggregate investment at home increases the households will save much more of the increment of their income than consume during each period. An increasing aggregate investment will make no problem if productive investment is dominant over unproductive investment within it, which is a healthy economic development. On the contrary, if unproductive investment is dominant over unproductive investment, that’s a big problem, because that means an asset bubble whether the national income is increasing or not. The former case is when the schedule of the marginal efficiency of capital is improving; the latter when deteriorating – when the aggregate investment is increasing.

Both productive investment and unproductive investment increase the savings when an aggregate investment is increasing in the manner that the national income increases. A paraphrase of it is that when the national income increases it isn’t always favourable. A higher GDP growth is not always favourable to economic development. It matters in what way the GDP grows. It is not necessarily ‘appropriate economic policies’ that will mark a higher GDP growth; inappropriate economic policies can also mark a higher GDP growth – as observed with Edward Gierek.

Mr Gierek’s government increased its external debt to change the borrowed money into the zloty thus increase the money supply denominated in zloty by applying an exchange rate to give out the increment of the money supply to the industries so that they would be able to supply more consumer goods and to the households so that they would be able to purchase more consumer goods. That means that when the economy was growing under his government, the households were not consuming their aggregate income but saving it when they were purchasing more consumer goods, and the aggregate income came from the borrowed money. In other words, the Poles saved the money they have borrowed from abroad in a direct manner! That is the real fact of the Gierek bubble, which popped and caused the long recession or lost decade in Poland.

I say a tortoise is faster than a hare, and oscillating around the 20-yr average growth rate of 4.4% (or slightly less than that, considering the decreasing shape of the schedule of the marginal efficiency of capital) must be safe enough. A big deviation upwards will probably cause a disaster afterwards while a big deviation downwards will follow or take place simultaneously with a disaster.

[to 2/4]

[2/4]

A similar bubble to the above will take place if not only the public sector directly increases its external debt but also the private sector, including banks, increases its debt by borrowing from abroad. That is why hot-money influx is very dangerous as the most speculative form of debt/asset transaction.

The 6% (5.3%, but assuming to be 6% now for convenience’s sake anyway) is a figure that considers insolvency probability as well as some empirical trend line of interest at peace time. Insolvency probability is not mathematically or statistically calculable, such that bond investors can only ‘speculate’ the probability when they decide the interest rate at 6%, the CDS pricing at, say, 230 bp, etc. The Polish government was actually insolvent two decades ago and given a haircut of as much as 50 per cent of its public debt. It had been paying the instalment until as recent as March 2009. That is why bond investors have been remaining very prudent with the Polish bonds ever since so much that they only agree at relatively high interest rates until recent and 6% today.

The long-term interest rate of 6% reflects long-term inflation expectations. Inflation reflects the credit of the currency differentiated at present – in a negative manner. Inflation expectations reflect how the credit of the currency differentiated is being expected to be after the given period. Inflation roughly depends on effective demand. Hence, you can assume if inflation expectations decrease due to an increase of the aggregate supply that the long-term interest rate will decrease so much that you won’t complain, “Businesses have to pay relatively high rates on international borrowings which discourages real world investment,” and “After all why take a business risk when you can get a 6% return for zero risk and zero effort?”

But, again, this is only about aggregate figures, and doesn’t guarantee that productive investment will outrun unproductive investment when the aggregate supply is increasing.

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[3/4]

I suppose the above is difficult for you to understand at first. If it is (and I think it must be), it’s because, as I said fist, you are thinking upside down about savings and investment at macro-level. When you think of savings and, you may be thinking of

Households either consume or save their income of each period. Savings is thus all the remainder of their income after consumption. At equilibrium, the aggregate savings is equal to the aggregate investment, and when we think of investment in general we should divide it into private investment, government expenditure and net export. Therefore, the then savings appears in the form of investment plus government expenditure plus net export of the non-household sector (i.e. domestic businesses plus government plus foreign businesses). The amount of investment changes the amount of savings and not vice versa, because the household sector has the role of production through which the credit of the economy changes. This is described as ‘an investment dog wags its saving tail’. A lot of people and even a lot of economists think upside down and assume that ‘a saving dog wags its investment tail’ and that interest rate is decided at the intersection of the funds-supply (i.e. savings) schedule and the funds-demand (i.e. investment) schedule (i.e. loanable-funds theory) to eventually think in the way you did on long-run policy-making. I had long been thinking that I should talk about this big flaw somewhere in the Eastern Approaches blog. So, I am not criticising you at all: This is about everybody’s mistake.

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[4/4]

The Polish government hasn’t much increased its spending recently. It only increased the deficit financing just after the Lehman shock, and has been decreasing it – in an eventually rapid manner – ever since.

Whether Mr Rostowski is capable or sufficiently ruthless to push through all too necessary reforms is too obscure a question. When you are thinking of reforms as ‘ruthless’, you may probably be thinking of thrift generally. But, thrift is not necessarily what the government should primarily aim at, which now you may as well understand. It’s because what matters is whether productive investment will keep replacing unproductive investment. Markets are cyclical, such that they cannot change portfolio in a favourable manner. It is the government that holds a portfolio-alignment function through its fiscal policy and legislation. The government holds ability to invest money into projects that may induce productive investment to replace unproductive investment (i.e. improve the schedule of the marginal efficiency of capital).

The assumption that “preventing “hot monies” flushing in and then out of the Polish financial markets can only really be done by Poland joining Euroland” is not necessarily right. If Poland is to join the euro area, 1) the area must have established the fiscal union by then – even just to a sufficient extent – so that Brussels will hold more active role in realigning the mal-distribution of income between the member states like what a national government usually does with local governments, and 2) the area must add some stronger frictional resistance to financial transactions (i.e. higher transactions cost), particularly against capital flowing through its borders. If Poland is still staying outside the euro area, it should work in collaboration with its neighbouring economies, especially with the euro area as a matter of course, to add some stronger frictional resistance against transactions between assets denominated in zloty and assets denominated in foreign currencies.

Cheers!
Jasiek

P.S. By the way, Mike, don’t you think it’s rather unusual for Edward to pick up a macroeconomic issue here? ;-)

Jasiek w japonii

Supplementing my previous comments;
I mean, unlike Japan where domestic institutional investors hold 95 per cent of its public debt, foreign investors will come to hold more of the Polish debt than Polish institutional investors will.
That is, the fact that foreign investors find Poland to be a safe heaven and flock to the Polish debt will increase the ratio of debt to net asset of the entire Polish economy and eventually reduce its public-finances stability by that much.
Be careful not to be dazzled by NGDP growth. NGDP doesn’t explain the portfolio or real aspect of investment within the economy. Hence, a higher NGDP growth isn’t necessarily favourable unless productive investment keeps replacing unproductive investment, while a sub-zero NGDP growth’s psychological effect is so negative that it is always likely to discourage (both domestic and foreign) investors from investing into the economy. It matters how little the NGDP growth is volatile while it stays around a moderate rate. A tortoise is faster than a hare. Poland, with its moderate (i.e. moderate for a developing economy) 20-year average growth rate of 4.4 per cent, has actually been the world’s best student for the last two decades while a lot of people would ridicule it for the apparent ‘sluggish’ pace of its economic development.
That foreigners have sensed that Poland’s potential is much greater than they had thought is good by itself. Then, the best way to utilise the ‘good atmosphere’ is to expand its balance sheet outside Poland. That is for Polish investors to raise funds and purchase foreign companies and foreign bonds outside Poland, and when things are at a downturn sell off those assets to raise its cash reserve so as to maintain its liquidity sufficiently to keep paying interests and principles. At peacetime, Polish investors will enjoy nice returns from investment abroad, and that will increase capital accumulation at home, which will encourage industrial enterprises to increase their quality at home. That is, Poland can maintain its financial stability and entrepreneurial strength by sacrificing assets it holds abroad or keeping volatility off the economy.

Jasiek w japonii

Now that the world has sensed the potential of the Polish economy, it is time that the Poles took greater care not to allow hot money to flux in that would make the zloty much stronger to discourage the industry and its related employment at home while the same would encourage speculative asset-purchasing, its related employment and debt accumulation.

P.S. It would be wise for the Poles, particularly their public authorities and responsible investors, to always keep liquidity-preference theory in mind when they analysed both short-run and long-run dynamics of employment, interest and money instead of loanable-funds theory.

shaun39

Just demonstrates the virtues of the Euro: even with Italy's appalling growth prospects and awful indebtedness, its government borrows more cheaply than Poland's.

As does Spain, Portugal and Ireland.

The euro not only offers price stability in international trade - it also offers greater liquidity and cheaper finance for both Polish government and Polish industry.

Only one matter is crucial: tight fiscal discipline and use of fiscal/ leverage levers to combat excessive capital flows.

It is good that this lesson was learnt early - Greece and Spain took the fall. Let those errors never be repeated.

MilovanDjilas in reply to shaun39

Italy's appalling growth prospects as opposed to whom?

We had 0.5% growth in 2011 - the UK 0.9%, and this with a budget deficit of 8% and after significant quantitative easing and devaluation of the pound sterling.

We are estimated to have a contraction in 2012 between -0.5% and -1.0%. And in the UK?

Ireland had a 1.9% decline in gdp in the third quarter, leading to forecasts of less than 1% growth in 2011. Their forecasted gdp growth in 2012, 0.7%, masks a gnp decline of -0.8% (that is, not including the receipts of foreign companies - mostly German - who declare their profits in Ireland).

Likewise, American gdp growth of 1.6% in 2011, with estimates of 2.5% in 2012, look much less impressive when measured against an 8.6% deficit in FY2011.

As for our "awful indebtedness" - 118.6% of gdp at year-end 2010 and perhaps 119.2% at year-end 2011:

1) Our excessive debt was mostly accumulated during the final stage of the Cold War, from 1978 to 1992 - as we went from 60% to 120% debt-to-gdp;

2) Take a good look at the indebtedness trends for most other G7 countries - or indeed most EZ countries. Our level of indebtedness will be declining this year. Many countries, in fact most other large countries, will see their debt ratio pass ours up within 2-5 years.

Malopolanin

I am shocked that you have the Polish name for our finance minister.
In Poland, he calls himself Jean Vincent Rostowski.. Though I have to mention that he is a subject of HM Elizabeth...

Malopolanin in reply to Karol669

That was a joke. I do not know whether his name is Jan, Jacek, Jean-Vincent, Jan Wincenty, Jan Vincent.. The medias have used all of those names to describe him.
Although, wikipedia has this interesting note, that his grandfather was named "Rothfeld". It says that in 1940, he changed his last name to Rostowski. http://pl.wikipedia.org/wiki/Jakub_Rothfeld
Astonishingly, the only politician to admit to his Jewish roots is Ludwik Dorn, the extreme rightist.. Why do Michnik, Borowski, Rostowski cover up their roots? http://pl.wikipedia.org/wiki/Marek_Borowski
http://pl.wikipedia.org/wiki/Adam_Michnik

moderateGuy

"Polish borrowing costs are still quite high by international standards, at around 6%." and here you'd think the banks flush with money stolen by Nazis during the last war were more circumspect about such things...

About Eastern approaches

Eastern approaches deals with the economic, political, security and cultural aspects of the eastern half of the European continent. It incorporates the long-running "Europe.view" weekly column. The blog is named after the wartime memoirs of the British soldier Sir Fitzroy Maclean.

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