Monday, April 9, 2012

Rio + 20 part three: Eastern Europe versus Asia.

            As I promised in my first article on the upcoming earth summit in June, which I wrote in February, I intend to write a piece on the subject every month leading up to the summit, and one last article in July to reflect on the final outcome.  My first two articles concentrated on the main problem that seems to be completely ignored, which is that global sustainability put into economic terms, is a public good.  In other words we will only have it if we go about it the same way as we do when we reach partial consensus on building sidewalks or public parks.  The partial consensus is needed to support the policy, and mechanisms meant to ensure that everyone, including those who dissent, pays for the project, are needed in order to make it happen.  In the absence of such an approach, we will always be left disappointed and eventually suffering the consequences, as the historical record can tell us.

            In my previous articles, I mainly compared mature developed economies, such as from Western Europe, which took it upon themselves to go it alone in the quest for sustainability, with developing nations, such as China, which is currently benefitting not only from lower wages, but also from fewer regulations and enforcement of environmental and worker protection rules.  Some may be tempted to argue that the stagnation of Europe is happening because they are developed nations which already accumulated as much capital as they can, while the developing nations are in the middle of accumulating it.  On a graph drawn on a piece of paper it looks great, but in reality it can be shown that it simply is not the case, because we do have the East European countries, which still qualify as developing nations which should be in convergence mode, but are not. 

            I hope I will not be misunderstood as a result of writing this article.  I do not want to take away from the argument that some of these countries are suffering from self inflicted wounds, due to cultural failure to adapt to a post communist world.  Some East European nations were able to adapt better than others, as the table below can testify to.  When we put them up for comparison with other developing nations from Asia, of various developmental stages, we can see clearly that the self inflicted damage argument, which sometimes conveniently takes all the blame for the situation in Eastern Europe, cannot explain away the huge disparity that exists in growth rates that the two regions are experiencing.

Eastern Europe economic indicators versus Asian Competitors.

Czech. R
South Korea
Not Free

            If we look at the table I prepared, we see that all countries I picked for comparison, except for China are considered to be free.  In other words we can expect innovation to flourish, because there are few barriers to information and private capital flowing freely.

            In the corruption category, it is hard to argue that Eastern Europe is plagued by more corruption than Asian countries.  China seems to have an edge on the face of things, but in this case we have to take the result of the findings with some skepticism.  All indications are that local governors and lower level officials may be more corrupt than what one may expect to encounter in any of the above mentioned East European countries.  For some reason, it does not seem to show up in their corruption rankings, but I have it on reliable witness description of the situation there, that it is quite bad.  Other than that, as we can see, There is little difference between South Korea and all East European countries, except for Romania, while by far the most corrupt place from this bunch is India.  So corruption cannot be the differentiating factor.

            If we are to judge the level of worker competence by literacy rates, the above chart clearly shows that Eastern Europe has an advantage in this category.   South Korea is the only place that can be considered to be equally competitive.  There are of course many other measures on education that we can refer to, and some of them may yield somewhat different results.  One thing that neither of those comparisons can ever claim is that Asian developing nations have a great advantage in comparison with Eastern Europe in terms of worker skills, so this cannot be a differentiating factor either.

            When it comes to per capita GDP, the poorest country from this group is from Asia as well as the richest.  There is therefore not such a strong argument to be made for two different regions that are at different stages in capital accumulation.  Yet, if we look at the chart, there is actually no overlap whatsoever between East European nations and Asian countries when it comes to recent growth rates.  If we were to broaden the chart to include all developing nations from Europe and Asia, we would get some overlap, but not a significant amount.  The only EU members that grew at a comparatively competitive pace in 2011 are the Baltic States.  Estonia for instance achieved a rate of over 6%, which places them in the 31’Th place globally.  I should point out however that if we were to average out the growth rate in the Baltic region over a decade, and compare it with the Asian region, we would similarly see a significant disparity.  The Baltic States saw double digit recessions during the recent crisis, while Asia continued expanding.

            If we compare the general trend of the two regions, and project their most likely economic outcomes, we get a picture of two regions with very different future outlooks.  Asia is set to become the most important economic region on the planet.  Eastern Europe is looking more and more like a sad case of failure, despite all the ingredients for competitiveness being there.  A few decades from now, we may in fact witness the  complete collapse of a few of these states.  At the moment, from all the above mentioned examples, only the Czechs seem to be immune from the danger of complete failure.

The real differentiating factor:

            Given that we have two regions that on balance should be roughly equally competitive, and yet one region clearly outshines the other, there has to be another factor that makes all the difference.  The difference is that Eastern Europe was drafted into Western Europe’s crusade of unilateral global goodwill, and model behavior, through being conditioned to do this as a prerequisite of joining the EU family.  This means that the cost of doing business in Eastern Europe is automatically higher, due to more stringent environmental regulations, as well as laws protecting people from overexploitation.  So in other words, they are handicapped economically, exactly because they agreed to follow the path of the first Rio summit, and the path that is also being proposed at Rio + 20, by the UN and its 56 recommendations. 

There is an additional burden on the regional economy as a result of having to forego certain opportunities to develop the economy.  For instance, Poland and Hungary have significant coal reserves, yet they both had to forego the opportunity to exploit the resource, in favor of increasing cleaner burning natural gas imports from Russia.  To put it into perspective, Hungary has on a per capita basis, four times more coal than China does, which is currently responsible for almost half of the world’s coal production and consumption.  If Hungary was to exploit its coal reserves at a similar rate per capita, and additionally adjust for its higher reserves per capita, it would have to increase its current production of coal almost tenfold from current levels.   This means that tens of thousands of jobs in mining disappeared, in the last decades, or were never created, which actually means that hundreds of thousands of jobs were lost, due to the amplified effect of loosing additional jobs that the original economic activity would have supported within the community.  The balance of trade is also affected, due to having to increase natural gas imports.  Over time, this resulted in lower yearly GDP growth and a higher debt to GDP ratio.  A rough estimate I can give for the difference that this path had made to Hungary’s development is that it’s debt to GDP ratio would likely be somewhere near 60% of GDP, instead of the 80% that it currently struggles with.  Unemployment rate would be about 3-5% lower, so instead of 11% currently, it would be about 6-8%.  Because of the additional jobs retained and even created directly and indirectly thanks to the positive effects of using local coal, instead of expensive imported Russian gas, Hungary would have been able to retain some of the population that migrated away in the last two decades.  Together with a steady influx of ethnic Hungarians migrating to Hungary from neighboring states, would have meant that they would have been one of the few states that would have been relatively unaffected by the coming demographic catastrophe, which will become evident in the Eastern Europe region in about two decades.  This assessment, compared to the UN report which claims that their recommendations only carry limited economic downsides for volunteering countries, is the big elephant in the room, which everyone wants to ignore.

This is the last article that concentrates on the failure of the approach to global sustainability that is already evident after the initial twenty years post Rio 1, and is still the approach that is favored as the top recommendation for Rio + 20, coming up in June.  The Europeans hoped that if they would create a working example of a region that can flourish even if they sacrifice in the name of the common good, and even remain competitive, then everyone else will follow.  It is somewhat easy to explain away the current economic failure of the EU as just a side effect of being a mature economy, which is just too far ahead in wages to be able to remain competitive in the face of the surging East.  It is harder however to explain the lack of economic progress that the eastern part of the EU is faced with, despite being a still developing region which should be converging, and yet it is not.  I am sure that other developing nations are also tuned in to this situation, and I doubt they will be willing to voluntarily do this to themselves in the name of the common good.  Similarly, developed nations such as the US, which still shows some vitality will also turn its back on the UN proposals, because at this point, given the tougher global environment, it is an issue of survival, which is looking less and less certain for the good Samaritan Europeans, who thought naively that they will singlehandedly, and unilaterally save the world.

The first step towards sustainability was a step in the wrong direction, which already cost the world two decades.  The sooner we admit to it, the sooner we can take the step back, and re-direct towards the right path.  The first step that needs to be taken towards identifying the right path is to finally admit that sustainability is a public good and it needs to be treated as such.  Unfortunately it seems that no one in higher circles is willing to spell this out thus far.  As things stand now, the UN will recommend taking further steps towards disaster for both those who will follow their recommendations, and those who do not.  There are two months left to avoid the loss of another precious two decades, which might be two decades we cannot afford to loose, because if we do, there is nothing left but irreversible disaster.  A Rio + 40 will probably never happen, so it is either now, or prepare for individual survival, because the common good will not be achieved. 



  1. Your articles are interesting and informative. I do not question the truthfulness of the data that you are presenting, but I think and would like to see the source (original) of your data. Could you possible state it where ever you are "citing" in your articles or at the end of your article, as "short references"?

    1. Sure thing, it is not a bad idea to do so. Sometimes I, cited in text. Generally, when it comes to energy related issues, The EIA is a good source of information. For GDP, or demographics related data, the IMF, World Bank, and CIA factbook are usually helpful places to go to for information. I will do my best to cite information in future articles, in order to help people look at the information themselves.