Yuri Baltgailis, Dr.oec
One of the problems created by globalization is de-industrialization experienced primarily by the Eastern European countries who joined the European Union. Only for this reason, Latvia, for example, loses every year a 20,000-plus city: 250,000 Latvia’s inhabitants have left their country over the past 11 years. Since the restoration of its independence, Latvia has lost about 25% of its population. The percentage of young emigrants from Latvia (17%) is almost twice as high as the average European index (10%).
American futurologist Francis Fukuyama, who is trendy in Brussels nowadays, sees a way to the universal state via the middle-class society formed by means of education. He reminds us that inequality penetrates through the system as a result of unequal access to education, and the objective of the modern education is to liberate people from prejudices and traditional authorities.
The growth of wealth disparity gave rise to systems like AEOI (Automatic Exchange of Information) – in the framework of struggle against Base Erosion and Profit Shifting (BEPS), that will allow governments to control tax payments by monitoring information from offshore zones where illegal wealth gravitates. This wealth, according to the majority of the world leaders, should go to community funds, primarily to educational programs and medical care. Redistributing revenues globally, governments will be trying to even the revenue base, to decrease income inequality, and to mould a middle class as a foundation of any civilized state.
Against the backdrop of increasingly hot discussions on the need of structural changes in the European Union, the European Parliament decided to speed up the introduction of the uniform social standards. General European patterns of the minimum income are being promoted. One of the goals of the Europe-2020 Strategy is to reduce by 20 million the number of people exposed to the risk of poverty and social estrangement. Today over 120 million Europeans are in such a situation – not least because of long-term unemployment, low salaries, and poor social security, especially in the countries who were most affected by the crisis. Employment and social security are among the few spheres that are still within the competence of national governments.
The Minimum Income Scheme can become the first step towards the introduction of the uniform standards in the social sphere. The academic research has already been done to this end. In 2013, on the initiative of the European Commission, the platform called the European Minimum Income Network was launched, and within its framework European researchers study the welfare and salary models active in the EU countries and offer their recommendations on enhancing them.
The advocates of Brussels’ intervention into social policy of the participant countries stress that this is not about a specific amount as a universal standard: they could use a conditional rate, or a certain methodology. According to the resolution adopted by the European Parliament on October 20, 2010, the minimum income should make at least 60% of the country’s average income. In Latvia, where in 2015 the average salary before taxes was € 818, the minimum suggested by the European Parliament should be € 490 (actually, the minimum salary last year was € 370).
The uniform standards will have to be introduced step by step. The first stage could be the introduction of the minimal salary as a compulsory component of any national policy. At present, six European countries do not even have this notion in their national legislature. The next stage will be working out principles for calculating the price of the cheapest labor. A similar principle could be applied to the adjustment of pensions and social allowances.
The idea to harmonize social system standards, revolutionary for the European Union, has already been stated in several resolutions by the European Parliament. The introduction of the uniform standards is actually a tool for raising earnings in the poorest EU countries. This measure should slow down the labor migration within the Union: it has long been bothering the inhabitants of the Old World and is one of the reasons for the growing popularity of far-right nationalist parties.
If the idea of the Euro-MPs is realized Latvia, Lithuania and Estonia will be among those who will have to undertake large-scale reforms. The local business communities are not too happy about this perspective, as this will mean more social tax payments. The minimum salaries in the EU countries vary today in the range of 300-1920 euros. In this respect, one can speak of three groups: the ‘eastern block’ (Bulgaria, Romania, Lithuania, Czechia, Hungary, Latvia, Slovakia, Estonia, Croatia and Poland, with the minimum salary below € 500); ‘southerners’ (Portugal, Greece, Spain, Slovenia, and Malta, where the minimum salaries are between € 500 and 1000); and ‘westerners’ (the lowest paid workers in Great Britain, France, Ireland, Germany, the Netherlands, Belgium and Luxemburg get over € 1000 a month).
Creating the global system of the automated information exchange and minimum income patterns should bring capitalism back to earth, to real life, without highlighting the superiority of some countries and global players who suppress the world by means of international monopolies. The calculation of the gross domestic product should take into account not the exaggerated market figures but the real wealth of the population, the normal conditions of human existence, it should mould the middle class that is able to bring economic and political stability to any country.
Generally speaking, the recent developments in the foundation of capitalism are rather off the beaten track: capitalism is trying to globally use levelling and rigid administering though the market should regulate everything itself, with the least influence on the monetary base, demand and supply.
The reason for these changes is that the highly irrational globalization process is killing economy through the usurpation of markets by international corporations and imposing of political and economic dictatorship in these areas. Most of the Eastern European governments realize that the complete dependence on foreign capital can be dangerous so at least some basic assets should stay in the national possession. But how to provide for this when national business is unreliable and does not like long-term investments? As a result, the state just keeps the best assets to itself, or creates a class of surrogate businessmen whose national orientation is guaranteed by their dependence on the local authorities, both formal and informal.
True, the European Union is more and more closely monitoring the equal access to everyone in privatization or distributing government business, so the governments in Eastern Europe have just one way to preserve the state control over their countries’ best assets: to leave them in the public ownership. In 2015, 25 years after the market reforms were launched, in 14 out of 25 Eastern European companies with the largest capitalization the main shareholder was still the state.
Neither political democratization nor liberalization of economy helped to create an influential nationally-oriented business class in the Eastern Europe, that would be interested in long-term investments in national economies.
The main competitive advantage of the Eastern European states in the international division of labor is still the relatively inexpensive and skilled manpower (plus natural resources in Russia, though, with low prices for raw materials, their importance is going down). But this advantage is fading as the gap between them and the developed countries is being decreased. The closer Polish salaries are to their German counterparts, the less reasons there are for German companies to work in Poland.
Most of the Eastern European countries have reached the point where their manpower is not cheap enough to compensate for disadvantages. Eurostat produces enough optimistic tables where the per capita GDP (based on purchasing power parity - PPP) of the Eastern European countries is catching up with the EU average index. But in fact, this rather refers to the levelling of the eastern part of the European Union with its southern part while the process of approaching the leading EU economies stopped long ago.
Maxim Samorukov from the Moscow Carnegie Center gives an interesting example from the automotive industry that has become one of the main drivers of the economic growth in the region and yields 15-20% of export receipts in some of the countries. Slovakia has been especially successful in this field leading in the car production per capita: with a population of 5 million, it manufactures about a million cars yearly. In 2014, the automobile industry in Slovakia (including subcontractors) provided for 200 thousand jobs and accounted for 43% of the country’s industrial production, 28% of export, and 13% of the GDP.
This seems to be great: cars are not primitive raw materials but a sophisticated technological product with a high added value. But the problem is that these 43% of the industrial production are provided by just three companies, and none of them is Slovakian: they are Volkswagen, Peugeot Citroen, and Kia. In 2014, Volkswagen yielded 41% of all the cars manufactured in Slovakia, which means that one German company provides for 20% of the country’s industrial output and 5% of its gross domestic product.
What will happen to the Slovak economy if Volkswagen transfers its production facilities somewhere else, like it transferred them earlier to Slovakia? Today Volkswagen is happy that it can pay salaries in Slovakia two or three times lower than in Germany. But how long will Slovaks be happy with this?
Should we compare Eastern European economies to the main European economy – that of Germany, we will see that in 2007-2008 they were rapidly reducing the gap in the per capita GDP (PPP). However, after 2008 this process stopped and, in some cases, even reversed. In Russia this reverse motion is explained by the loss of super profits from the oil export, but it also took place in other countries who became the closest to the German level: in Slovenia (drop in 2008–2015 from с 75% to 66%) and in Czechia (from 70% to 67%).
This is what Mr. Samorukov thinks: the economic model of Eastern Europe originally implies that its living standards should be around twice lower than in the developed countries, otherwise it will lose its attractiveness. If the economies of these countries make a breakthrough during a cyclical upturn it is always followed by a crisis, stagnation and backsliding: they are unable to resume their growth before they restore their development gap.
This is exactly what has been happening to Czechia and Slovenia recently. Slovenia’s example shows too clearly what will happen to Czechia, Slovakia, Poland, and other countries when their salaries approach those of the countries who move their factories east. In 2008, Slovenians broke a record for Eastern Europe: their average salary reached 63% of the German salary. Since then, Slovenian economy has been experiencing a grave crisis and even in 2015, seven years later, its GDP was lower than before the crisis. So far, it is not enough to reduce the average salary and make it 60% of the German instead of 63% to resume the stable growth.
People are reluctant to put up with the idea that their salaries will be 100 euros higher, but only after the salaries in Germany increase by 200 euros. In this situation the most active part of the society will leave their homes for German and Scandinavian salaries, like millions of Poles, Lithuanians and Latvians have already done. And those who stay back are sure to start searching for another development model, the first and quite natural choice of the disappointed society being national-populism.
A modern human with a university degree has often a blurred view of irrationality, which is caused by the powerful and dynamic globalization process. A century has passed since Max Weber announced the irrationality of capitalism; over this period the global processes (that rather aggravate world contradictions than solve them) have proved that capitalism is not only economy but, first and foremost, a religion! Any religion is based on faith and not on positive knowledge and logic, so it is always irrational to a greater or lesser extent. So far only few serious-minded authors notice that capitalism is not only and not so much economy but a spiritual arrangement of the society and the individual. So a number of authors distance themselves in a politically correct way from the word ‘capitalism’ using the term ‘market economy’ instead.
The driver of the market economy is skilled manpower: it operates in those countries who can boast the most successful economic development and are the destination for highly-educated manpower, including that from Latvia. Interestingly, over the ten years after 2004, the number of patent applications submitted to the world’s major patent offices grew 1.8 times and by 2014 reached 2.2 million. This growth is mostly due to the patent activity of China: the number of applications in China has increased 6.5 times and now totals around 850 thousand a year, which is 1.5 more than in the USA or in Europe. This is where the brains will drain…
In this regard it is interesting to look at the experience of small Estonia, the first country in the world to promote e-residency. Anyone who feels like it can obtain Estonian e-residency from home, get an e-signature, set up a company, open a bank account, do business in Estonia, buy and register realty, and apply for a real residency. Nearly 10 thousand people have already become Estonian e-residents, and most of them live in the neighboring Finland and Latvia. This is a way both to attract capitals and investments to the country and to enter the global market of intellectual property, to acquire educated and advanced people, to put a claim to one’s place in the global world. What is more, all Estonian authorities, including courts and the police, are ready to work with e-residents in the virtual space. It is quite possible that after testing e-residency in Estonia, this experience will further spread in the world and some day we will find ourselves in the global virtual space.
After the trials of the virtual country project, the next issue to be discussed will be religion and ideology of the virtual global space. I think that the "spirit of capitalism" discovered by Max Weber 100 years ago was created primarily not by the Protestant religion, but by the religion of money. Religion itself is increasingly transforming into an intellectual product having a value. According to the USA National Council of Churches of Christ, yearly incomes of some church associations exceed ten billion dollars. Among the religious services offered on the market is now a "Church of Satan" and major corporations invest heavily into this project considering the investments highly lucrative. Is it not a paradox?
In the virtual space, it will be difficult for a person to sort out real values if already today Christian values are substituted and eroded. At the initial stage of capitalism English theomachist philosophers - Francis Bacon, Thomas Hobbes, John Locke – introduced the idea about a man being not a God’s creation but an egocentric animal having a set of feelings and instincts. Actually, this selfish animal was a proto-ideal of the "market economy" - homo economicus. From Jean Calvin people learnt the revolutionary idea that money is a sign of being chosen by God. Unfortunately, masses would rather accept something that coincides with their wishes and feelings than the truth. That is why the idea of the state, with its punitive mechanism, as the only "earthly god" for the evil human being was promoted so extensively.
By the way, the ideas of these English philosophers are very close to the Marxist-Leninist teaching: the same aggressive atheism, the leading role of the powerful class-based state as a tool for suppressing and controlling the man and its intellect. The approaches to property, though, are different, but the creeping globalization and socialization according to Marx are gradually wrapping these theories into a single package.
Today, with the development of the global virtual space, the process of overcoming the state’s framework can become irreversible – it has already broken away from the habitual rules and borders. The intellectual product is becoming the most-wanted commodity in this world while it is increasingly difficult to evaluate it by means of the market. The state will be losing control over the society’s intellectual potential that is inherently freedom-loving. To squeeze it into certain confines or to wrap it in artificial theories or religious clothing will only be possible if we control globalization and use the world institutions that are rapidly multiplying. New Luther, Calvin, and Marx will be required to inflame the users of the virtual space and to impose another fetish on them (if new Snowdens or Assanges do not succeed in defaming it). Here it would be appropriate to remember the question asked by Ostap Bender: "How much is opium for the people?" Yes, first came Columbus with his ships full of gold, and only after that - Luther with his 95 theses. And then capitalism was launched – at the cost of violent looting of colonies. It is hard to imagine that the modern virtual space can be dealt with like colonies…
We & WE( We & World Economics ), AZERBAIJANI MAGAZINE ON ECONOMICS, FINANCE AND BUSINESS
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