A Dirty Europeanism from Beneath

I have just been reading Misha Glenny’s McMafia. It is excellent; an intelligent tour through the criminal landscape that emerged since the late 1980s, driven by a combination of globalisation, un-globalisation, technical change, and the usual things that fertilise big crime. We hear about the early history of the modern Russian mafia, how the UN Security Council created one of the world’s most effective criminal networks by trying to deny the former Yugoslavia cigarettes, and much more.

Some points that stand out:

1 – Networks

A common trend in all the criminal systems Glenny covers is a shift from hierarchical structures to decentralised ones; the four dons who controlled the Bombay underworld up to the late 1980s are replaced by a shifting confederation, mostly independent, vaguely loyal to Dawood Ibrahim in his Dubai fastness. The traditional prison gang hierarchies of Russia and South Africa are replaced by flat networks of crooks. The multi-criminal smuggling route through the Balkans, once authorised and taxed by the Bulgarian secret police, warps into a complicated weave of different ones open to every thug in southeastern Europe.

2 – The Great Shift

Everywhere Glenny went, both cops and thieves always said the same thing in the same way; in the early 1990s, they were in control and then “something odd happened”. New forms of crime; new actors; new communities; new drugs. Similarly, traditions and habits that kept things roughly in limits and facilitated both illicit and licit business were suddenly torn apart. Grand old yakuza chiefs were murdered in their beds; the harbour suddenly filled with shiny speed boats with unusually deep and thoroughly reinforced cockpits. And wham! Nothing was normal ever again.

3 – Fake Police and Police Fakes

So much of this proliferating mayhem was driven by the people who were meant to oppose it. In Russia and Eastern Europe, a major force was the sheer number of spooks and wrestlers looking for a job, and for that matter, the existing smuggling systems set up by people like East German STASI Colonel Alexander von Schalck-Golodkowski to raise hard currency. But even more important were the strategic decisions taken by world powers, which often created the legal barriers around which criminal profit grew. The economic blockade on the former Yugoslavia was one; the drugs war another.

4 – Complicity

The great spree would never have been possible if so many people hadn’t been customers, to say nothing of direct corruption. Japanese banks, during the great bubble, were delighted to cooperate with yakuza thugs; the tobacco industry saw nothing at all unusual in shipping absurd quantities of cigarettes to tiny Swiss cantons, from where they were re-exported on ex-Soviet cargo aircraft that invariably needed to make refuelling stops in Montenegro, during which the ciggies and the export papers vanished. The cigarettes crossed the Adriatic in wild-arsed powerboats into the hands of the newest Italian mafia, the Sacra Corona Unita of Puglia, and went from there to everywhere in Europe. The aircraft went on to the ex-Soviet Union, to Slovakia’s ZTS-Osos and Bulgaria’s KINTEX arsenals, and brought back arms for the Balkan wars, bought with the government’s share of the profits.

Similarly, the iconic European industrial achievement, GSM, used huge quantities of rare minerals from central Africa and the ex-Soviet Union, which arrived on some of the same aircraft, backloaded from further arms shipments after the Balkan wars were over and the region became an arms exporter again. It’s worth remembering that the secret police of Yugoslavia were well aware of arms dealing, having been a big exporter before the Balkan wars. And, more broadly, millions used prostitutes, smoked dodgy cigarettes, and took cocaine.

5 – The Boss Fallacy

So many cops Glenny quotes had the same experience; they finally caught the Big Boss, but everything got worse afterwards. Once the old sheikh was nailed, they expected the crime rate to fall, but instead something odd happened; all hell broke loose. It wasn’t just that the crooks fought among themselves, which the cops usually welcomed. It was that they competed harder, and that the rules and traditions and habits that usually constrained them were torn away with the traditional hierarchy. Suddenly there were no rules, or rather, there was a savage fight to set the new ones.

And killing the hierarchy changed things more subtly. The structure of the underworld changed; it became decentralised, federal, anarchist. The old hierarchies were repurposed to legitimise the new gangs, which meant that their mythos of leadership and of terror could be extended to anyone whose outfit joined the confederation. Arguably, the new structures were not just more survivable but more efficient and more scalable than the old ones.
On the other hand…

Looking across this shady landscape, though, there are some bright spots. There is something inspiring about the vigour of it all, the refusal to listen to the government, the company, the Big Don, or any other authority. The European Union was very keen to talk revolution in the East, much less to open the doors. But long before they were opened in 2004, unofficial Europe was working hard. And, in fact, it had been at it for years; Ameisenhändler at the Bahnhof Zoo, gastarbeiter from Yugoslavia working all over the continent, InterRailers, university system administrators hooking up X.25 and IP links. I remember that one day in 1995, cheap smokes and Czech lager and high-powered German fireworks suddenly arrived in our valley in the Yorkshire Dales, sold weekly in one of our local pubs. The bus route from Leeds to Osnabrück, a subsidised liberty-bus for BAOR soldiers, was also a clubber-transfer link before the arrival of EasyJet.

Practical Europe, of a sort. Crime is nothing if not practical. One of the telling things about McMafia, as it applies to Europe, is just what a society Europe could have been in the last 15 years with a little more courage early on. And we did pretty well anyway.

Horrid Outlook in Ukraine

Not to beat a dead horse or anything, but it seems that Krugman, via Edward, was right after all. This does indeed seem to be a great depression if there ever was one.

(from Bloomberg)

Ukraine’s economy probably shrank as much as 23 percent in the first quarter of the year as the global financial crisis took its toll on the eastern European nation, President Viktor Yushchenko said. “The economic contraction is expected between 20 percent to 23 percent in the first three months of the year,” said Yushchenko today, according to a statement posted on his Web site. “The pace of the decline is one of the fastest in Europe.” Yushchenko urged the government to review the state budget for this year, which still assumes the economy will expand 0.4 percent, according to the statement. A global recession is compounding problems in eastern European economies, which are being battered by a lack of credit, weakening currencies and plunging demand for their products. Ukraine was forced to turn to the International Monetary Fund with other emerging-market countries, including Hungary and Latvia, to boost its financial system in November.

Ukraine’s economy shrank 8 percent in the fourth quarter, the first contraction since 1999. The state statistics committee is expected to release gross domestic product figures for the first quarter in late June.

Of course, we need confirmation and I would not be surprised if the number reported by the government turned out to be wrong (in either direction!), but the the initial shot across the bow suggests a veritable collapse.

Europe’s Economic Activity Looks Up (a bit) In May

Well the eurozone outlook is certainly deteriorating less rapidly at this point than it was, at least this is the impression given by the May flash Purchasing Managers Indexes (PMIs) – which show the pace of economic contraction slowing markedly from April. PMI readings for the 16-country euro area rose significantly this month, and hit their highest level for the last eight. It is, however, important to bear in mind that the index still registered contracting economic activity, even if the rate of decline fell for a third consecutive month. Chris Williamson, chief economist at Markit, who compile the indexes, said the latest readings were consistent with second quarter GDP falling about 0.5 per cent quarter on quarter (or by a 2% annual rate), well down from the 2.5% quarter on quarter GDP outcome (or 10% annual rate) in the first three months of the year. That being said, we are still in the realm of contraction, and organisations such as the International Monetary Fund, the European Commission and European Central Bank continue forecast a return to positive growth only in 2010. Continue reading

Don’t Get Carried Away Now!

As Paul Krugman recently pointed out, one of the central points they made in the latest IMF World Economic Outlook was that recessions caused by financial crises tend to get resolved on the back of export-lead booms, with countries normally emerging from the crisis with a positive trade balance of over 3 percent of GDP. The reason for this is simple, since consumers are so laden-down with debt from the boom period, they are naturally more obsessed with saving than borrowing during the initial crisis aftermath. So much then for the typical crisis, and the typical exit. But musing on this point lead Krugman to an additional, rather disturbing, conclusion: since the present financial crisis is truly global in its reach, the habitual exit route to recovery will only work after we are able to identify another planet to send all those exports to (shades of Startreck IV). The joke may seem a rather exaggerated one, in poor taste even, but behind it there lies a little more than a grain of truth. Continue reading

His brain is not involved

There’s a slightly notorious Japanese proverb: “the nail that sticks up will be hammered down”. For several weeks, M. and I have been trying to think of a British equivalent. We were both sure there must be one. Well, now we have a candidate. It’s the phrase: “he’s a bit of a loose cannon”.

Both sayings point to a normalising intent. The intent to normalise: it’s out there. And if we don’t like the idea of being normalised, we’ll find sayings such as these objectionable, perhaps even slightly embarrassing. And nails, hammers, cannons. All very instrumental. All very metal, for that matter. But there are differences. The Japanese saying is perhaps more fatalistic than disapproving. You sense regret that the hammer must fall; perhaps it would even be better if one or two nails were to remain sticking out. No such regret with the cannon. A half ton composite of iron and oak hurtling across the gun deck: that’s something nobody wants. And hammering won’t help: there’s no hammer big enough. Instead, a dozen strong and resolute men, with careful timing, must catch up with the careening twenty-four-pounder and restrain it. First with one rope, then with more ropes.

But that’s not all. A real cannon is big and heavy; on the loose, it really might maim or kill. The ‘loose cannon’ saying, on the other hand; well that gets said of people who threaten nothing more than saying something truthful and heartfelt at the sector strategy conference. And then there’s the qualifier: he’s a bit of a loose cannon. How mealy-mouthed is that?

Anyhow, AFOE readers: do other cultures have their hammer / cannon sayings?

Is Hungary Set To Become The New Iceland?

Iceland, why on earth Iceland? Well, the issue I have in mind concerns the independence and viability of central bank monetary policy (especially in a small open economy like Hungary’s) and the role interest rates, and investor sentiment, and yield differentials, and oh yes, I almost forgot, that notorious vehicle so beloved by investors the “carry trade” in producing a situation where financial dynamics get really out of hand.

In a visionary paper given at the International Conference of Commercial Bank Economists (held in Madrid, July 2007) – entitled The Global Financial Accelerator and the role of International Credit Agencies – the Danish economist Carsten Valgreen argued the following:

The choice major countries have made in the classical trilemma: ie, Free movements of capital and floating exchange rates – has left room for independent monetary policy. But will it continue to be so? This is not as obvious as it may seem. Legally central banks have monopolies on the issuance of money in a territory. However, as international capital flows are freed, as assets are becoming easier to use as collateral for creating new money and as money is inherently intangible, monetary transactions with important implications for the real economy in a territory can increasingly take place beyond the control of the central bank. This implies that central banks are losing control over monetary conditions in a broad sense. The new thing – this paper will argue – is that we are increasingly starting to see the loss of monetary control in economies with stable non-inflationary monetary policies. This is especially the case in small open advanced – or semi-advanced – economies. And it is happening in fixed exchange rate regimes and floating regimes alike.

Interestingly enough, Valgreen chose as his paradigmatic examples of central bank loss of control over monetary policy the cases of Iceland and Latvia. Equally today we could add the name of Hungary to our list. As Valgreen argued (and this remember, before the sub prime blow-out):

It is no accident that the two examples are small open economies with liberalised financial markets. Being small makes the global financial markets matter more. A country such as Iceland will be the first to notice that the agenda for monetary policy has changed, as the current and capital accounts are naturally very large and important for the economy. However, this is more of a reason to study its experiences carefully, as they might show something of what is in store for larger economies over the next decade.

So the issue really is, does the Hungarian National Bank continue to control monetary policy in any meaningful sense, or is it reduced to responding to events elsewhere? And does the Hungarian government have any effective tool left with which to fight this crisis? But getting ahead of ourselves and going too far into all this, let’s step back a bit, and take a longer look at the Hungarian economy, just to set the scene. Continue reading

Timid in Tokyo

Here are some more of those dizzying negative numbers that Edward mentioned: Japan GDP growth preliminary estimate for 1Q 2009.  -15.2% annualized with a 26% drop in exports quarter-on-quarter.  But it’s worth looking at the underlying numbers in some detail.   Concentrate on the 2nd column for 2009 1Q which shows each expenditure component’s contribution to the change in GDP.  Sure, the export decline is scary but it’s moderated by the decline in imports in terms of the effect on GDP.  The main action is coming from a collapse in private non-residential investment — this is not an Irish-style housing construction led crash.  Businesses have pulled back.

Now these accounting decompositions only get you so far.  Weakness in export markets could explain the decline in investment.  But there’s something else.  Contribution of government to GDP change: 0.1 percentage point, against the backdrop of large changes in the other components.  For all the talk of G20 stimulus, this government is sitting on its hands.   With the US, China, and now Australia bellying up to the stimulus bar, perhaps it’s easy for the government to assume that a foreign-led recovery is imminent.  No wonder those Japanese housewives are looking abroad again.

The Russian Government Forecasts A Possible 8% GDP Contraction For 2009

Of course, with all these large negative numbers doing the rounds at the moment, we are all in danger of going rapidly dizzy, but some pieces of data still have the power to shock, like this morning’s announcement from Russia’s Economy Minister Elvira Nabiullina that the economy may shrink as much as 8 percent this year.

“The specific contraction numbers could be 4 percent or 6 percent or 8 percent,” Nabiullina said in an interview with Bloomberg Television in Moscow today. “We’re doing various calculations, pessimistic and optimistic. We believe much depends on how efficient we are.”

So the Russian Government is still running through the scenarios, and the ministry now promises to submit new growth forecasts by the end of the month, but it is worth bearing in mind that, as recently as last January, the most probable estimate stood at minus 2.2 percent. And the Economy Ministry aren’t the only ones with the excel sheets and calculators out – Alfa Bank, Russia’s largest private bank, Goldman Sachs, Citigroup and the International Monetary Fund have all revised their 2009 growth forecasts down recently, with Alfa this week cutting its outlook to minus 5.7 percent from an earlier anticipated drop of 3 percent. Nabiullina’s deputy, Andrei Klepach, recently described the International Monetary Fund’s estimate for a 6 percent annual drop as “realistic.” Continue reading

Japanese Housewives Back in the Game?

I am sure all those deadly serious investors, analysts, and commentators we hear so much from have been hard at it of late, trying to keep track of the broadest possible range of indicators in an attempt to to discern whether all those shoots of green would continue sprout, or whether what we have been seeing was merely a blip on the horizon of what may well be a very long recession. Clearly, what we have been seeing in the economic data does now seem to be a bit more than a mere blip, although what actually happens next may well take many of the consensus analysts completely by surprise. Continue reading