I have recently read about the launch of Ford’s new car for the emerging markets – the Figo. The car is expected to be priced at between 5.000 and 6.000 EUR and will be sold initially in India. There have been in the past news about even cheaper vehicles launched in the emerging markets – Tata’s Nano being the best-known example. The Nano was a resounding approach because it was extremely low-cost, at around 2.000 EUR.  And, these types of products usually do have success in the countries for which they are designed.

At the same time I could not help thinking what impact such a low-cost vehicle would have on Europe’s economies, provided it could be sold at these prices. First of all, it’s necessary to bring into the discussion the obvious barriers that exist for such products. There are first of all the safety norms and also the environmental norms and regulations. These barriers limit a manufacturer’s capacity to sell cheap cars on Europe’s markets but, there’s more to it.

Besides the typical aforementioned arguments, a fleet of low-priced vehicles would be a bad deal for the downstream industries as well. Consider the amount of premiums the insurers would receive for a motor hull policy on a 2.000 EUR car. Or, the interest a leasing company and/or a bank would collect from a loan of such a value (indeed, if the buyer would even need a loan). Even worse, what commission could a car dealer charge or what profit would a repair service make based on such a product?

Europe’s economies are highly dependent on the transport sector. An important segment of businesses is involved in selling, financing, insuring, repairing and servicing the cars we use. The current economic recession has shown what happens if the demand plummets. The fall in car sales was one of the biggest problems the governments have tried to control. Germany and other states have introduced special schemes to support the selling of new cars (the government would pay an allowance (voucher) in exchange for the scrapping of an old, used car and the voucher could be used only for the acquisition of a new vehicle). Putting a large amount of cheap products on the markets would have the same impact as a reduced demand (ceteris paribus).

There are examples of low-cost cars on sale in Europe as well but, the prices are way above those in Asia. The Logan is a familiar example and Dacia’s new model, the Duster, an SUV priced at around 10.000 EUR. These vehicles are very benefic for the Eastern markets. With a relative low purchasing power and a low level of motorization in the region, these products fit the needs. In the West however, a major influx of such products could destabilize the connected industries.

Strictly from an economic point of view I am not arguing about the need to maintain the current status quo. However, the regulations do just that. And, as long as technical innovation brings new safety and environmental technologies, the regulators will incorporate them into the list of mandatory requirements. As long as they will, the downstream industries will use their current business models.

Generally speaking, it’s a political choice for high quality and the price rises accordingly. Collaterally however, this type of policy stimulates a disproportionate allocation of resources to the connected businesses.

I would like to start this post by bringing into the discussion an issue that seemed to be obscured in the debates that took place in the mainstream media regarding the current economic crisis : the fractional reserve banking system that is used in the current Western societies.

To describe it briefly, within this system the commercial banks basically pursue their activity on the basis of the money supply they themselves have created. The technical term for this process is called, hardly surprising,  money creation and it represents the banks’ ability to deliver loans that are uncovered in the majority of their amount by any counter-balancing value. The amount that is covered is represented by the fractional reserve that the banks must maintain (in fiduciary currency) in accordance with the regulations imposed by the central bank.

At a first glance, this process seems fully discretionary in the sense that it allows to much control and power to the private banking sector. It does; however there are some self-regulatory control leverage mechanisms – the most important of which being the risk management policies. The fear of bank runs and the perpetual pursuit of profitability act as key incentives for banks to keep their policies somewhat sustainable.

So, what did go wrong? The most rational responses in terms of expertise lead to the conclusion: systemic failure. Indeed, there was a systemic failure. The sub-prime crisis was at its roots an asset bubble. These  market anomalies (or failures) take place when poor risk management measures are conducted.

What happened was that in effect, an important amount of the money supply (which took the form of debt) was defaulted by the lenders. This lead to serious problems for the financial system in the US and the rest is history.

(Here is a brief visual description)

The financial instruments that were used by the system were blamed for the outcome. They were considered by many as to innovative in order for the bankers to assess correctly the risks.

The conclusions I was able draw are the following:

1. The systemic risk in represented at its origins by the fractional reserve system. Allowing private entities to create and distribute the wealth within societies based mainly on corporate risk management schemes is similar to riding a sports car without safety belts.

2. Financial innovation (FI) is a delicate issue. Unlike innovation in other areas, in the case of FIs the market mechanism of bankruptcy can’t act efficiently as a correcting measure.  And if it does, the social costs are huge. The problem becomes increasingly delicate when governmental bail-outs are de facto guaranteed – and moral hazard is created.

Thus, the only viable solutions can be in the following direction:

1. Strongly regulating the financial sector in order to limit money creation in accordance with risk;

2. Tightening control on the financial instruments in use and promoting sustainable innovation - which for FIs means the ability to generate an acceptable level of risk assessment.

The Western world has the responsibility to transfer its best practices to the governance structure of developing countries in order to deliver stability.

While reading Neagu Djuvara’s book “Thoctomer”, I felt intrigued to sketch a brief comparison between the two great economic systems that the Western civilization has used during its existence. Also, I must add that it will take into consideration only the socio-economic aspects, leaving the political sphere unaddressed. Extrapolating the base and superstructure theory, this approach seams the logical thing to do, considering that the political institutions have evolved according to the economic system in use.

Personally, I have waited with great enthusiasm the outcome of the referendum in Ireland concerning the newest EU Treaty, but I am expecting with even more curiosity the course that the Union will set for itself after the ratification.

There has been a flood of speculation regarding the figure that will gather enough support to be nominated President of the European Council, as well as to the set of prerogatives that will be allocated to the new institutional flagship . The Economist’s Charlemagne sees two sides: Tony Blair and everyone else.  For obvious reasons, the choice of a public wide-known figure such as Blair will attract more international attention and render more influence to the EU, while a more tehnocratic approach will just mildly improve the current status quo. My personal belief is that Europe can sucumb into a position of irrelevance without firm political action, and the decision to underuse the new institutional context (yet to be fully ratified) to prepare a relaunch (in political and economical terms) is a mistake.

Let’s imagine a Europe without Lisbon. Let’s imagine a world without Europe.

Although Oswald Spengler’s “Untergang des Abendlandes” was repeatedly criticized and the proposed models are not considered fully valid today, I think it’s safe to say that an outline of his work regarding the phases of a civilization’s development is scientifically acceptable. Spengler assumed that the current era represents the downfall of the west and, by a parallel to the Ancient European civilization, similar to the decay of the Roman Empire. Where is Europe in this equation? Extending the analogy, at the same point Ancient Greece was at the middle of the first millenium.

Here , I think, are the main characteristics of the world with a sinking (in importance) Europe:

1. Bipolar mania. China and US are top rivals for hegemony in the world. China is viewed by a significant number of  analists as the main challanger in economic and political terms. US is still holding the lead but has an uneasy advantage.

2. The Westphalian nation-states system is still the dominant paradigm with little signes of change. Concequently, peace is not achievable in most parts of the world. Military tensions still high.

3. Losing influence, Europe will lose wealth, in relative terms to other countries. Africa can suffer from a shortage in financial aids from the EU.

4. Projects that were promoted internationally by the EU are losing support. Renewable energy is not yet economically imperative, therefore without political stimulus climate change will not ameliorate very soon.

5. Because of the cause layed down at point 4),  resource hegemony (relating to energy resources) will still provide political power and international influence to states in the Arab World and to Russia. This will lead to a stagnation in their reforming.

On the economic side, in the recent past a revolution took place. As business processes became ever more complex and markets increased their level of competition, outsourcing seamed the best way to adapt the old-fashioned institutions into becoming more efficient. The reasons behind braking up the system of a big enterprise into its basic functions, functions that later became independent companies are numerous but the main are the following:

a) Complexity of functions. As the range of products and services needed becomes ever more complicated to be integrated in the economy, splitting the process between more companies is the best way to handle the job. This principle derives from the concept of division of labour, one of the most important steps in human evolution;

b) The gain in competitiveness. Keeping fewer functions in one single company enables it to achieve a higher level of specialization. This in turn leads to an improvement in efficiency and, most relevant cost-cutting. R. Coase stated in his essay “The Nature of the Firm” that the company by itself bears inefficiency, and that only a hyper-atomized supply and demand can lead to an ideal market;

c) Developing flexibility and fostering innovation. In the end, atomizing the functions of an economic process will contribute to making the entire system more dynamic and adaptable. Adaptability is a direct effect of the newly acquired innovation capacity that smaller structures possess. A trend that underlines the importance of these assets is the creation of spin-offs;

After all this braking-up took place, networking came to reassemble the puzzle together. It was a natural phenomenon that arose from the need to connect the new-formed entities into viable systems. While IT&C provided the much-needed support to bridge the gaps, its expansion was as well stimulated by these trends in the economy. Thus a symbiosis formed, in which networking, knowledge and information technology came to define the new era.

Europe’s case is a particular one in this evolution. The reshaping that took place according to the trends set in the mainstream was felt at all levels of society. Moreover, together with the US it is setting up at the forefront and constantly pushing forward in setting the trends.

As the theory of relativity has shattered Newton’s discovered principles into a small space-time capsule in which they were relevant, and as philosophy constantly renders religion as useful mainly in the cultural field by dismantling its axiological monopoly, so does the world-system theory exercise a huge paradigm change in the fields of economics, history and politics.

And, as all good things in this world, it’s not mainstream.

The approach was initiated by Immanuel Wallerstein and its basic view is set on a strange mixture or neo-marxism with the admittance of liberal economic reason. Basically, the evolution of politics and economics in the world is seen in the core-periphery relationship. The core acts as a hegemonic despot that has as its main goal the accumulation of wealth and power and, in order to do so, it seeks to control the activity of the periphery. Wallerstein sees four instruments of control as being fundamental to the maintenance of the status quo: “commodification, the multiplicity of modes of labor control, commodity chains, unequal exchange between core and periphery (asymmetric trade) and group of monopolizing non-specialized capitalists functioning as the anti-market”¹. What is interesting in this approach is that orthodox economics is recognized as being correct (in principle). Thus, Wallerstein states in his essay that competition is stronger in peripheral (poor) regions and also economic sectors. Here, there is no interest from the core to monopolize resources and factors, thus enabling for a wide dispersion of wealth and power at local level. On the other side, in key sectors and regions, monopoly is the best economic engine that can lead to the accumulation of wealth and therefore used extensively. An interesting example here is vertical integration, which is a form of monopoly, but is widely allowed (from a legal point of view) in the West.

The World System theory partisans consider that the current (modern) hegemony, that of the West, has begun to take shape only in the last two centuries, following an Asian-centered system². The latter was one in which China held a core position (in terms of demographics, resource abundance, technological advancement and political power) but was dethroned in the age of geographical discoveries (in the West) by Europe which came to appropriate large amounts of precious metals from the Americas and, latter man-power from Africa (see also the post How Africa Still Remains An Economic Colony Of Europe). J. Hobson states further in his book that what we currently acknowledge as history is just a deformed eurocentric perspective that ignores the underlying causes of our progress. I believe this to be true and a relevant example is the overwhelming list of Chinese inventions that predated the corresponding European ones we now so pridely recognize as being our own. In a previous post (Towards The New Cultural “Triad”) I have detailed also the fundamental differences in cultural terms between Asia, the West and the Arab World, regarding social organization and moral (social) values.

As the rise of Asian economies becomes more and more obvious and inherent, the approach posed by the World Systems analysis should act like a compass in predicting the future transfer of power and in the reshaping of the world economy.

¹ The Modern World-System and Evolution, I. Wallerstein, Journal of World-Systems Research: Volume 1, Number 19, 1995;

² The Eastern Origins of Western Civilization, J. M. Hobson;

I’ve stumbled recently on an article written by Friederich Hayek, called “The Use of Knowledge in Society”. Although this paper is pretty old (it was published in 1945), the ideas Hayek put together are of great significance today.

As economies integrate further, the change of ideas, concepts, information and know-how should be the baseline in forging a higher degree of cohesion between regions. However, as Hayek highlightened, knowledge is easier and cheaper to access than know-how. The difference between these two sets of information is primarily on the way they are generated. If knowledge is mainly produced in universities, schools and research centers (and is generally open publicly), know-how is the product of individual experience (and in the property of few entities). Businesses as well as public institutions fundament their capacity to self govern, organize internal processes and functions and conduct other management functions on a specific set of information arisen mostly from their own experience namely, know-how.

The barriers in transfering knowledge are relatively few and depending on capital intensity and infrastructure. In the case of know-how, certain economic structures and circumstances need to be fulfilled in ordered to break down the barriers. As know-how is found rarely as a public good (as opposed to most of the knowledge), beneficiaries need to buy it (and the price is generally very high). Consultancy agencies and training firms can provide solutions in terms of know-how but first the local competition must require an upgrade of such as provided by importing know-how. In a low-competitive economy, know-how imports (or development) is without an economic stimulus non viable because it’s a non-efficient investment.

Eastern Europe is importing for some time now knowledge from the West and pumping up it’s level of economic efficiency. On innovating and creating knowledge it has remaind behind shedule, but this was to be expected. However, on the level of know-how, there is still much more to be done, mainly because the local competition does not impose such upgrades. In the long run it will, and then B2B consultancy services will be on the forefront. Today knowledge is still more important and that is why international MBAs (such as CEU Budapest) and trans-European university programs are the mainstream.

I’ve stumbled recently on the concept of  amoral familism invoked in an article from a Romanian newspaper.

After researching it, I was completely amazed that I discovered it so hard, when it can be used to describe a vast array of problems Southern Europe is facing. The best definition of the concept is given by the Oxford Dictionary of Sociology: “Social action persistently oriented to the economic interests of the nuclear family“, and it highlights the basic mechanism of asserting value for individuals originating from this region. It is significantly different from methodological individualism (a mindset attributed by von Mises to Europeans), because the individual loses the big social picture (the perspective of the collective good) and focuses exclusively on a narrow group of people that he is discriminating (in a positive sense) without any thought of the general moral (and, in an extreme case, legal) norms.

The first question anyone would ask is if this is not normal, given the fact that anyone cares for its family and is consequently looking out for their best interests. The answer is no, because amoral familism assumes defending the interests of one’s family at any cost.  Countries in which the population exhibits this behavior as predominant are Italy, Greece, Bulgaria and Romania. Here are some examples of the behavior that arises from a culture immersed in amoral familism:

1. Using family ties as sole (or, at least, primary) arguments to ascend on the professional latter. In politics, for example the daughter of Traian Băsescu – the president of Romania – is running for the position of MEP. The local press has significant doubts about her professional abilities;

2. Treating the family members as people exempted from the law (protecting them without any regard to the law, in case of a criminal offence or such). This mindset can explain the sociological background that supported the rise of the Mafia in Italy;

3. Profiting from corruption – disregarding the general norms for the benefit of one’s family. Bulgaria was heavily criticized by the European Commission for it’s corruption scandals.

And the list can go on.

Collective values tend to have little or no relevance in cultures revealing this phenomenon, thus provoking ill-functioning institutions and public organizations that act in disregard to the common good. The main economic an political effects are: a strong polarization of wealth and an arbitrary state of law.

Here’s a cloud of the most relevant words used in this blog.

Created with: Wordle