Friday, January 27, 2012

Hungarian Rhapsody... in blue

An atrocious article appeared on Real Clear World the other day that took me by complete surprise. I was shocked and appalled that a site which almost always maintains a compendium of insightful pieces on global issues had the audacity to carry what can only be called a testimony to shortsightedness. This particular piece by Alex Berezow sought to find the roots of Budapest's current troubles in the unfriendly disposition of the Hungarian people towards the outside world.

Never mind the fact that Europe as a whole has tilted increasingly right-wing since the financial crises, ignore the fact that Hungary's economic woes have been particularly hard on its people, forget historical lessons on how the public reacts to economic difficulties and place yourself in a vacuum - this is where Berezow begins his search for the origins of the Hungarian crisis.

Of course, I must admit that I have a soft spot for Hungary and its people - I visited the country as a child and went back to study abroad in Budapest and enjoyed my experiences there. I am certainly carrying a bias; however, Berezow's commentary blatantly ignores visible roots of the problem and dismisses the current conflict between Brussels and Budapest as a particularly Hungarian problem.

But why should people outside of Hungary and Europe care about this issue? For starters, it's an important case study of state driven economic nationalism that parallels increasing nationalist sentiments of the public - to categorize the current issue in Hungary as a unique case ignores how societies in general are susceptible to irrational behavior in times of economic hardship. It's not enough to point out these trends without delving deeper into the causes. If we gloss over these important issues when pertaining to others, how can we ever be critical of ourselves when similar problems arise in our society?

And if Hungary ends up seceding from (or thrown out of) the union, it will be a precedence for the future of the European project and a possible precursor to its dissolution, which will most definitely impact the international economy.

First the crisis itself:

The ongoing controversy surrounds Prime Minister Viktor Orban and his center-right Fidesz Party, which won two-thirds majority in the 2010 elections and thereby gained the mandate to amend the constitution without consent from the opposition. Fidesz received this overwhelming popular mandate because it promised to fix the economy, blaming much of the economic woes on the previous government under the Hungarian Socialist Party (MSZP). But promises are always easier made than carried through.

Claiming to be paving the path for economic recovery, Viktor Orban asserted the need to increase government control over Hungary's fiscal and monetary policies. Despite the fact that maintaining an independent central bank was a rule established by the European Union to ensure macroeconomic stability, Viktor Orban amended the structure of the Hungarian Central Bank to accommodate an additional vice governor who would be directly appointed by the government (recommended by the PM to the president, but a Fidesz president will never challenge a Fidesz PMs' recommendations).

In addition to the central bank, Fidesz has used its position in the parliament to increase government control over other previously autonomous institutions such as the media and the judiciary. Deterioration of the checks and balances, be it economic, political or judicial, establishes the ground works for extreme abuses of power. This is particularly disturbing because the far-right wing party Jobbik is lurking in the shadows and I shudder to think what would happen if its members were ever to join the ruling government as part of a coalition.

As the legislation on the central bank was brought before the Fidesz-controlled parliament to be rubber-stamped, the European Union Commission fiercely criticized the legislation as irresponsible and contrary to Hungary's treaty commitments with the European Union. As a serious breach of trust, it became a real possibility that Hungary may be chucked out the union. Budapest remained obstinate... meanwhile, the concerned IMF pulled the plug on the preliminary negotiations for financial assistance and forced Prime Minister Orban's hand.

Hungary chose a bad time to revolt. Orban's Thatcher moment was not to be. The Economist observed on November 26, 2011 that
When Hungary hit the rocks in 2008, the outside world was quick to help with a $20 billion package, fearing contagion to other wobbly ex-communist countries. Now the picture is different. With most ex-communist members of the European Union in better shape than old members in the south, the east European label is looking meaningless. Two of Hungary’s neighbours—Slovenia and Slovakia—are in the euro. Poland is the unquestioned diplomatic and economic heavyweight. Mr Orban looks like an oddball, and his country is now a lower priority, at a time when lenders have more urgent calls on their time and money.
Without assistance from abroad, the Hungarian economy faces downfall - and the world will hold out on assistance until Budapest repeals its recent laws. The Hungarian leadership has finally come to grips with the consequences of joining the European community: in return for increased economic contact with the continent, its political and financial decisions will be subject to review and scrutiny by other members of the community.

With its credit rating meandering in junk status, Hungary returned to the negotiating table where the IMF recommended not only reestablishing an independent central bank, but also repealing the draconian measure that forced judges into early retirement. The Hungarian side has agreed to reconsider the central bank issue, but rejected the suggestion of changing its judicial rules to satisfy the IMF and the European Union.

The political entity in power seems split on what it envisions for Hungary's future - a European Hungary or a sovereign nation that does not answer to an extra-national body.

So what is the cause of this crisis?

Only a lazy observer will trivialize the problem by merely citing attitude as the key problem.

And yet for our commentator, Alex Berezow, the heart of the problem is the Hungarian people themselves, their supposed unfriendliness and pervasive xenophobia. Berezow cites three personal examples to support this assertion - a girl's refusal to take a picture of him and his wife in front of the Hungarian parliament, a story he heard from an Irish woman about a Hungarian telling her wrong directions on purpose and a child singing what he thought to be an anti-American song. After providing these wildly random examples, he points to the rise of the ultra-nationalist party Jobbik with its racist policy proposals as a wider symptom of the same problem his fragile self experienced while visiting Budapest. He is apparently bent on trying to justify his experience in a wider context beyond a mere misunderstanding and a series of bad experiences.

He does bring attention to important issues such as the attack on the freedom of the press and abuses on the Hungarian Roma population. He even goes as far to note that the problems became more acute when Fidesz took power in 2010, but does not delve into the socio-economic conditions behind Viktor Orban's landslide victory. How did a party gain such an overwhelming level of support in a democratic society? Why was there a sudden show of support for Jobbik by a sizeable portion of the public? Have Magyars suddenly become less friendly since the 2006 elections?

Economic difficulties tend to produce mass social dissatisfaction - Note that support for the ultra-nationalist Jobbik party during the 2010 elections came largely from eastern Hungary, a historically poorer part of the country where the recent economic crises have impacted people the hardest. Hungary is not alone here, the worsening economic conditions have given ultra-nationalists throughout Europe an opportunity to promote themselves by blaming the country's problems on outsiders. "If only foreigners left, there would be more jobs and less crime..." it's a rhetoric heard often enough around the world.

We have seen the public turn towards radical choices throughout history - the most extreme example being the meteoric rise of the Nazis in Germany during the Great Depression. In fact, it is the experience of hyperinflation during the Weimar Republic (1918-1933) that has led the Federal Republic of Germany to be extremely cautious about letting other members of the European Union ride the dragon of inflationary policies because Berlin sees it as a precursor to populist demagoguery and fascism (This American Life had a really good podcast episode on the rise and fall of the Euro and the role Germany plays in the currency).

But the neo-fascists are not in power (yet) - in 2010, the Jobbik party did not manage to control a single constituency. It entered parliament for the first time based on Hungary's political system which allows proportional representation. And it's hard to imagine the people of Budapest turn to Jobbik for guidance on economic issues - but if the issue comes to asserting Hungary's political status, who knows where the votes will go.

For now, Viktor Orban's targets are internal as much as they are external - placing Fidesz loyalists or those with personal connections to the ruling party in key positions ensure long term influence in state policymaking, even if Orban leads the party to defeat in 2014.

It's too soon to really believe that Hungary has gone down the path of extremism and will be soon ruled by Jobbik. However, I forward the notion that as long as systemic economic problems plague the European Union (and therefore Hungary), Hungarians will be increasingly tempted by radical establishments. To assert that it's only Hungarians who needs to learn to "play nicely" ignores the inherent pressures facing Budapest - Europe, and in particular Germany, needs to appreciate the needs of smaller and weaker member states.

Berlin has forgotten that it was not hyperinflation that pushed people towards Nazism during the Weimar period, but rather it was the resulting economic instability and shame of defeat that made Hitler so attractive to the disgruntled and dissatisfied German public.

Yes, there is the flip side of the coin - Greeks appear unwilling to make real reforms, Italy is hopelessly in debt and Hungarians are blatantly disregarding its political obligations; however, if Europe cannot resolve these matters together without coercion and through multilateralism, then the grand vision of a united Europe was not to be.

Of course, I am not on the ground in Hungary and cannot comment with certainty on how the Hungarian people perceive themselves. So why did I write so much on this? Probably because it pissed me off that some dude got paid to run a shitty article where he complains about a bad travel experience and turns it into a wider political commentary. What a jerk.

I should have left Bugs Bunny to explain the interrelations between the member state of the European Union...

Monday, January 23, 2012

The Intractable Issue of Energy

As South Korea and Japan haggle over the most appropriate method of castigating Tehran for its nuclear program while also ensuring continued supply of petroleum from Iran, I think it's useful to recollect the insights of the late Japanese economist Wakimura Yoshitaro (1900-96). A member of the leftist economic circle, the Ouchi group, Wakimura warned that the transport of Middle Eastern oil was a potential flashpoint for global conflict. Having lost faith in the West's ability to negotiate without coercing oil producing countries, members of the Ouchi group concluded that continued dependence on oil and Japan's alliance with the United States would invariably pull them into an unwanted conflict surrounding the black gold. Their solution was for Japan to go nuclear.

Today both Seoul and Tokyo are struggling to balance their economic needs and their political allegiance to the United States. I argued in my most recent article on Asia Times Online that Washington's aggressive policies in the Middle East threatens East Asia's economic security and thus damages America's ties with its allies in the region.

Middle Eastern oil is indispensable to the global economy, but in particular to countries that rely heavily on shipping and heavy industry. South Korea and Japan both fall into this category - even though Japan developed nuclear energy after the post-war reconstruction, there are certain sectors where petroleum is irreplaceable. Part of South Korea's remarkable economic growth was based on its development of petrochemical industries, obviously an enterprise where oil is a prerequisite. Mind you, both nations are practically island nations that depend heavily on shipping for import-export. Nuclear powered container ships are still in their experimental stage.

Therefore, Washington's request to significantly reduce or ban import of oil from Iran comes as a serious blow to both Seoul and Tokyo.

Some experts in Israel have waived off concerns over loss of industrial output by suggesting that South Korea simply increase imports from other Gulf emirates. Besides, they said, diffusing Iran will help the denuclearization process in North Korea.

What's absurd about all this is how little regard these "professionals" have for the intricacies of trade and commerce. Yes, some Gulf states that have historically been terrified of Iran have offered to increase exports to South Korea. But oil from Saudi Arabia does not magically appear in your local gas station the next day - this requires more ships, rerouting of ships and funds, negotiating new deals (nearly three quarters of South Korea's imports from Iran are negotiated on a long term basis and only a quarter is bought on spot price) and dozens of other infrastructural and financial consideration have to be made.

In addition, South Korea's fiscal regime keeps the Won from being overvalued - this safety mechanism, while keeping exports relatively affordable, raises the cost of imports. Escalation of tensions in the Straits of Hormuz and the expansion of sanctions against Iran will invariably affect the market. At the end of the day, South Korean industries will be still be heavily burdened even if they are supplied from different sources.

It's contemptuous to color this as a simple process, especially when one country is bending over backwards to satisfy another's irrational fears.

Furthermore, what happens in Iran will not affect North Korea. Commercial links between the two states have already ebbed long time ago due to increased policing and oversight by the international community. North Korean missiles are no longer entering Iran, but nuclear proliferation expert Joshua Pollack noted that technology transfers have continued unabated. And why point to North Korea? It's the single greatest example of how punitive sanctions don't always work.

Meanwhile, Washington has long recognized its diminishing power in the Asia-Pacific. Obama's "pivot" seeks to reassert the importance of the United States in the region - And let's be fair, no one has forgotten about the US. After all, US security guarantees to South Korea and the Seventh Fleet stationed in Japan are considered essential facets of the two countries' defenses. At the same time, US cannot revert the confluence of time. China's industrial prowess is going to inevitably make it economically influential in the region.

The Free Trade Agreement with South Korea and the Trans Pacific Partnership with Japan are two great ways for the United States to build on existing (and still massive) trade links with its allies in East Asia. Indeed, nothing solidifies a relationship between two countries more than the transfer of goods and peoples. Add ideals and sense of familiarity - the United States is still indispensable in every way imaginable.

How do you mess this up? Force your allies to swallow bitter medicine for a sickness they don't have.

Chinese premier Wen Jiaobao stepped in with good timing and suggested taking the Iranian issue to the UN. He opposed Iran's nuclear program, but he also noted the incredible hardship that will be wrought on the world if the sanctions expanded. It's a bad day when Beijing appears like the more rational actor. Make no mistake, Seoul and Tokyo are in part holding out for China to forestall the current crisis.

If the United States truly feels as though there is a need for a strategic refocusing in the Asia-Pacific, then Washington must take into greater consideration the interests and concerns of South Korea and Japan.

In fact, an American president must learn to better empathize with countries around the world in general. Wakimura Yoshitaro believed that powerful Western nations will never negotiate with, but merely dictate to Middle Eastern countries, creating conditions for simmering anger to one day boil over and scald the rest of the world. Time for the United States to step up and prove itself to be a better country than those from another era.

Read my less rambunctious article here

Monday, January 16, 2012

Is the US being played?

Assessing US foreign policy in the past year, I cannot help but get the sense that the Obama administration is too easily swayed by external and internal forces.

Two situations lead me to this position.

First, in the decision to attack Libya last year, the US appears to be forced into its final position by its European allies. Forget the "leading from behind" rhetoric that followed the initiation of the massive air strike campaign, both diplomatically and militarily, Washington routinely fell in line with the decisions made in London and Paris.

In particular, while Sarkozy and Cameron pushed regime change (via bang bang) from the very beginning, Obama only came around to really asserting this objective later. The initial US position was far more cautious and seemed incongruent with the European approach, but then President Obama continuously adopted the European approach and decided to do best under new conditions until Sarkozy + Cameron issued an even stronger position. Every step of the way, the US only committed its support after UK or France posited a resolution. Even the military action was inaugurated by the French.

It is very likely that the White House had no intentions of being involved in another military conflict, but saw the unity of the "West" and the appearance of American leadership as higher priorities (For all those still trusting in Obama's human rights oriented doctrine, turn your attention to all the humanitarian crises that have quietly slipped to the back burner). Once these central objectives were established, the whole approach to Libya was open to a hijacking by Sarkozy and Cameron.

Washington is under pressure to reassert its leadership over its traditional sphere of influence which is slipping from its fingers (Thanks Bush II!). To appear uninvolved in such a major undertaking would symbolize loss of control/to prevent Europe from intervening would invite a firestorm of criticism over not preventing a grievous human rights violation. So maybe "easily swayed" is not the right word - but my point is that there are diplomatic means to control European prima donnas from going rogue. Key word here is diplomacy.

Alternatively, one can offer the explanation that the sensitivities surrounding the US spearheading another military operation in the Middle East lead to Washington's haphazard approach to the intervention. Indeed, the US was very insistent on involving the Arab countries in the process as much as possible.

Nonetheless, if the case of Libya was unclear or appears to be in the outfield of Obama administration's foreign policy behavior, then consider the current diplomatic actions against Iran.

The imposition of increased sanctions against Iran appears politically motivated and counter intuitive to Obama's stated policy aims for the United States. I am willing to hypothesize that the motivating factors are the rhetoric emanating from the Republican primaries and Israel's increasingly aggressive moves on Iran.

Democratic presidents have always been afflicted with the "weak on dealing with foreign countries" label by the Republicans. Invariably, throughout the Cold War, Democratic administrations preemptively acted more aggressively than they wanted to undercut such accusations from detractors and presidential hopefuls (the most egregious use of this being the infamous 1964 LBJ campaign ad where he turned the table on Goldwater and insinuated that the US will be nuked if the election did not go his way).

Likewise, in the current Republican primaries, the GOP presidential candidates have been increasingly pointing to Iran as Obama's weak spot. It will invariably rise as a key issue in the final rounds of the presidential debate (unless Ron Paul stands against the incumbent president). Therefore, the administration's drive to widen the sanctions and bring East Asia into the anti-Tehran coalition could very well be political. It's not unheard of.

In addition, the US has the added trouble of keeping enough pressure on Iran to ensure that Israel does not repeat its air strikes on Iraq in 1981 and on Syria in 2007 - the potential consequences of an Israeli strike on Iran are difficult to assess, but Washington will have a hard time keeping Iran from responding in one way or another. Obama may very well be doing damage control to convince Israel that the US will resolve the matter without needing to resort to direct Israeli intervention. Last time the US refused to undertake military action against a nuclear facility on behalf of Israel, Israel did the deed themselves (Syria, 2007). The White House probably feels pressured, especially now that Israel is clearly increasing operations in Iran.

This is a complete misallocation of US power and inconsistent with stated policy aims. In outlining the "Pivot," Obama clearly saw the need to bolster its alliance with the Asia-Pacific, but by pressuring Tokyo and Seoul to fall in line with the new sanctions regime, reminded the two allies why wholehearted alignment with US foreign policy sometimes has negative consequences. Japan buys 17% and South Korea 9% of the crude oil exported from Iran - asking these highly industrialized countries to reduce its reliance on Iranian supply by any margin is expending a lot of political capital.

This is why even politicians like Japanese diet member Taro Kono (Liberal Democratic Party), who is undoubtedly keen on maintaining close ties with the US, suggests that Tokyo should have a separate foreign policy from Washington in regards to Iran. South Korea which is even less reliant on Iranian oil than Japan has not even responded to the US on its decision yet (and Seoul will not respond until it is sure South Korea has an alternative channel).

It's important to recognize that this is more than mere deficit of political courage - the 8 years of the Bush administration have done a lot to reduce US influence abroad and the range of options have narrowed ever since. Nonetheless, the Obama administration has been incredibly obtuse in building the right ties to prevent the escalation of predictable problems around the world. This has made the besieged president even more vulnerable to forces that inevitably influence the making of decisions that are often contrary to state interests.

How about them changes now, Mr. Obama?

Friday, January 13, 2012

Why not rice?

With the food-for-nukes talks underway between the North Koreans and the US, the negotiations appear to be bogged down on the details of the food aid package. The North Korean delegation has agreed to discuss ending the uranium enrichment program if the US shows "willingness to establish confidence."

So far, Washington remains quite unwilling to build the kind of "confidence" the North Koreans are talking about - mainly providing the remaining 300,000 tons of food aid that was promised to Pyongyang in 2008. The US is offering nutritional assistance (specifically protein-high supplements targeting younger children suffering malnutrition) instead because it fears that a substantial food aid package will be diverted to the military instead of going to the people in need.

This is a reasonable concern to have considering the number of times that Pyongyang had retracted its promises to Washington and the international community. However, if the US is willing to go as far as provide nutritional assistance, then it should consider and study the effects of providing North Korea with actual food aid, including rice and other grains.

Injecting the food deficient market with valuable rice could potentially play a crucial role in redistributing the food stuffs in the country. If the food aid actually reaches those in need, then the people can either consume it or sell the valuable grains for more quantities of less valuable grains, increasing their food reserve. And so far, based on reports from South Korean, US and UN aid groups, the North Korean government has shown capable of honestly distributing food aid to its people in the past year.

However, even if the grains are siphoned off by the party and military elites, the decrease in the demand for grains by the elites may help control the food prices that are growing out of control. Specifically, the sudden availability of rice will decrease the demand and price of cheaper grains such as corn and increase their accessibility to more impoverished North Koreans who have long relied on cheaper non-rice alternatives in times of hardship. Therefore, providing real food aid should be seriously considered as a means of significantly influencing the DPRK domestic food market.

All of this is purely guesswork and could very well make no sense whatsoever in the trained eyes of an economist or those with more up-to-date information about the economic conditions in North Korea. But I hope someone somewhere in the state department (or the White House) went through at least brain storming this before quietly excluding it from US foreign policy.

There are obvious political consideration involved, but again, the cost of a broken society will only be a future burden for the international community when North Korea finally collapses (whenever that may be...)

Sunday, January 8, 2012

More dangerous than drugs

According to sources from within the DPRK, Pyongyang has issued an order to block the use of foreign currencies and to severely punish violators. This order specifically targets the demands for US dollar and Chinese renminbi, two most popular foreign currencies used for purchases in North Korea. Sure to be catastrophic and impossible to fully implement, the government rationale has been that it was the will of its late leader Kim Jong-il.

I noted in my last article that Pyongyang's primary objective for its year of "power and prosperity" will be geared towards curbing rampant food prices and bringing inflation under control. The most recent measure to insulate the nascent domestic consumer market from foreign currencies appears consistent with the desire to fulfill the above mentioned goals.

Pyongyang is still reeling from the devastating currency reform in 2009 which nearly wiped out the savings of everyday North Koreans. In order to revitalize the people's trust in the central bank, interest rates were raised and access to savings was eased. However, the sudden influx of cash into the capital-starved system seems to have led to inflation and people are once again abandoning the North Korean won for more reliable currencies such as the USD or RMB. At the rate that the North Korean won is devaluing, the most reasonable thing an individual can do is to convert cash holdings to stable foreign currencies.

The state is clearly worried about its increasing inability to manage the domestic market. After all, the issuing of money constitutes an enormously powerful mechanism of control. Accordingly, the recent order apparently noted that the punishment for illegal use of foreign currency should be more severe than the repercussions for drug smuggling.

More importantly, how the government resolves this crisis will dictate whether North Koreans will have something on the dinner table tomorrow. The price of rice and corn has increased dramatically in the last few months and many North Koreans are unable to afford their already meager meals. Stopping the use of foreign currencies may be intended to increase the value of the North Korean won and make goods more affordable - it could also turn out to be another major blow to consumers and merchants alike.

More on this to come...

Wednesday, January 4, 2012

A legacy of death and inflation

Rather than the prosperous state Pyongyang promised for Kim Il-sung's centennial celebrations in 2012, Kim Jong-il's shortsighted economic policies leave his son in a position in which Jong-il found himself in 1994 - inheriting a nation facing famine. The capital's relative luxury has indirectly caused soaring food prices and the young Kim Jung-eun is faced with the insurmountable challenge of controlling inflation.

In addition, with winter setting in, North Koreans may also have to make the difficult choice between fuel and food. If the inflationary pressures remain, vast portions of the population will starve or freeze to death by the end of the winter.

The danger lurking around the corner is the possibility of North Korea falling back on anti-Americanism to channel the public's distress away from the falling living standards. It will not be a particularly difficult task as the state propaganda apparatus has already pointed to US-led sanctions as the key source of the country's hardships.

According to some sources, Kim Il-sung engaged in provocative actions in 1968 precisely because of this: to convince the people that sacrifice was necessary for national security.

You can read my full article here